US close: Stocks higher as Fed commits to more aggressive tapering

dl jerome powell federal reserve open market committee virtual press conference 3 november 2021 chair fomc fed jay pd — Fed chair Jerome PowellSharecast / public domain image

Wall Street stocks closed higher on Wednesday, after the Federal Reserve confirmed it was turning its tapering plans up to 11, and signalled three rate hikes next year.

At the close, the Dow Jones Industrial Average was up 1.08% at 35,927.43, as the S&P 500 added 1.63% to 4,709.85 and the Nasdaq Composite was ahead 2.15% at 15,565.58.

The Dow closed 383.25 points higher on Wednesday, reversing the losses it recorded before the Fed’s decision, as concern over the potential global impact of the ‘Omicron’ Covid-19 variant weighed.

“The December FOMC policy statement crystallised the Fed’s hawkish pivot,” said Oxford Economics chief US economist Gregory Daco.

“The term ‘transitory’ was benched in favour of ‘elevated’, the pace of quantitative easing tapering was doubled, and the Fed hinted that rate liftoff would occur if the economy is on track to reach full employment as the inflation goal has been met.”

In its decision on Wednesday, the US Federal Reserve said it would phase out its bond-buying programme by March - a serious hastening from its previous plans.

The central bank notably ran the tippex over the word ‘transitory’ with regard to inflation, and omitted the rhetoric that it was expecting to “maintain an accommodative stance of monetary policy until the goals of maximum employment and inflation at 2% over time” were met.

Its moves came after data out this week showed consumer inflation hitting its highest levels in the US in 39 years, putting serious pressure on the Fed to rein in prices.

Looking at the median interest rate forecast from the Federal Reserve, officials saw the federal funds rate rising to 0.9% by the end of next year, 1.6% by the end of 2023, and 2.1% by the close of 2024.

That would imply three 25 basis point hikes to interest rates in 2022 and 2023, and two in 2024.

In September, Fed officials were predicting just one rate increase next year, and the benchmark interest rate only reaching 1.8% by 2024.

“This is a welcomed step in the right direction, and we applaud the Fed’s transparency in explaining its dramatic shift, which is consistent with our long-standing view that the higher inflation is persistent and that labour markets have been moving rapidly toward the Fed’s maximum inclusive employment mandate, but are the FOMC’s estimates of the Fed funds rate sufficient?” asked Mickey Levy at Berenberg Capital Markets.

“History suggests that the FOMC’s estimates of the rate hikes will be insufficient to slow aggregate demand sufficiently to lower inflation.”

Levy said the economy, and inflation, had a lot of momentum, with inflationary expectations influencing wage and price setting behaviour, creating an upward feedback loop.

“We anticipate that the Fed will eventually have to raise rates well above the ‘dots’ in the December Summary of Economic Projections.”

Elsewhere, Democrats passed a bill to raise the US debt ceiling, with the bill now making its way to President Joe Biden to sign.

The 11th-hour bill came in just before the date Treasury Secretary Janet Yellen said the government's spending power would dry up.

On the macro front, mortgage applications fell 4% in the week ended 10 December, according to the Mortgage Bankers Association.

That was a marked reversal when compared to the prior week's increase of 2%, principally due to a sharp decline in refinancing activity, though purchases were also seen easing a little.

Looking at spending, Americans consumed with a little less abandon than expected last month, spending less on automobiles and parts and on electronics.

According to the Department of Commerce, in seasonally adjusted terms, US retail sales volumes rose at a month-on-month pace of 0.3% in November to reach $639.83bn.

Economists had pencilled in an increase of 0.8%.

Finally, the cost of goods purchased from overseas increased more quickly than expected during the previous month, chiefly as a result of dearer natural gas prices.

According to the Department of Labor, US import prices increased at a month-on-month pace of 0.7%, undershooting economists' forecasts for a rise of 0.8%.

However, the previous month's gain was marked up to show a jump of 1.5%, against a preliminary estimate for a 1.2% increase.

In equities, home improvement retail giant Lowe’s was ahead 2.01% despite its guidance for 2022 falling below Wall Street estimates, while pharmaceuticals company Eli Lilly jumped 10.4% after it updated the market on its drug pipeline and lifted its forecasts.

Cloud-based ‘internet of things’ (IoT) firm Samsara was 7.39% higher on its debut day, after it priced its initial public offering at $23 per share - the upper end of the guidance range.

Dow Jones - Risers

Cisco Systems Inc. (CSCO) $59.93 3.74%
Unitedhealth Group Inc. (UNH) $494.38 3.11%
Apple Inc. (AAPL) $179.30 2.85%
Amgen Inc. (AMGN) $219.25 2.58%
Merck & Co. Inc. (MRK) $75.29 2.13%
Intel Corp. (INTC) $50.67 1.95%
Microsoft Corp. (MSFT) $334.65 1.92%
Salesforce.Com Inc. (CRM) $260.04 1.74%
Home Depot Inc. (HD) $407.81 1.39%
Visa Inc. (V) $212.31 1.11%