Major stock market indexes extended a morning rally Wednesday after the Federal Reserve announced it would hold off on unwinding its unprecedented economic stimulus measures, and though the central bank said a change may be coming soon, officials stopped short of announcing a specific timeline, offering some respite to investors worried about an imminent change in policy.
In a Wednesday afternoon release, the Federal Open Market Committee said it would keep the federal funds rate unchanged at between 0% and 0.25% and continue its pandemic-era stimulus policy, pointing out that a rise in Covid-19 cases has slowed the economic recovery.
Headlining those stimulus measures, the Fed has been buying $80 billion of Treasuries and $40 billion of mortgage-backed securities every month since June 2020 to help stimulate investment and spur demand in the economy.
Stocks rallied immediately after the announcement, with the Dow Jones Industrial Average adding to earlier gains and climbing 508 points, or 1.4%, to 34,428, while the S&P 500 and tech-heavy Nasdaq jumped about 1.3% and 1.2%, respectively.
In a statement, Fed Chair Jerome Powell acknowledged inflation has risen beyond expectations and said broader economic progress, particularly in employment, may “soon” warrant a change in policy, but he doubled-down on the asset purchases, saying they “help foster smooth market functioning and accommodative financial conditions.”
Powell said no decision has yet been made about a specific timeline, but noted officials could announce one as soon as November and have deemed a “gradual” tapering process concluding around the middle of next year “is likely to be appropriate.”
“The path of the economy continues to depend on the course of the virus,” the Fed said Wednesday, adding progress on vaccinations will likely reduce the adverse effects on the economy, but saying risks remain.
The stock market started to recover from its pandemic-induced crash last year on the day Powell pledged to use the central bank’s “full range of tools to support the U.S. economy” until “substantial further progress” is made toward a full economic recovery. Though experts and lawmakers have increasingly warned the hefty policy measures could lead to runaway inflation, markets haven’t responded well to the prospects of decreased stimulus, with stocks posting their worst week in two months after the Fed signaled in August it could ease support this year. “There is clearly an appetite within the Fed to pare back asset purchases, but it must keep investors on board while doing so, or risk a dreaded taper tantrum in the markets,” Oanda analyst Craig Erlam wrote in a Wednesday email, referring to investor panic that rattled markets in 2013 after the Fed signaled a policy change.
$8.4 trillion. That’s how much the Fed has accumulated on its balance sheet after injecting more than $4 trillion worth of assets into the economy with its pandemic-era stimulus.
“While this isn’t more hawkish than feared, it’s not necessarily a reason to chase the market either,” Vital Knowledge Media Founder Adam Crisafulli wrote in an email after the announcement, reiterating that tapering could begin as soon as November.
Though Powell has long insisted the lagging labor market warranted ongoing economic stimulus, other Fed officials have pointed to high inflation as reason to curb asset purchases. Among the most vocal about tapering, St. Louis Fed President James Bullard has been urging the central bank for months to begin reducing stimulus this fall. ““I think that there is worry that we’re doing more damage than helping with the asset purchases,” he told CNBC in August, citing rising prices—particularly in the housing market—as his chief concern.
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