Shares closed lower on Wall Street on Wednesday after a rally after the Federal Reserve’s latest interest rate policy update faded into the final hour of trading.
The S&P 500 fell 0.5% after rising 0.6% after the Fed announced at 2 p.m. The central bank signaled it would keep interest rates close to zero in 2023 and has published a slightly less dire outlook for economic growth and unemployment this year.
The Fed’s decision to leave rates unchanged had been widely expected by Wall Street and continues the central bank’s policy of unprecedented support for financial markets since the pandemic plunged the economy into recession.
The Fed confirmed what we all thought, 0% rates are here to stay, probably for years to come, said Ryan Detrick, chief market strategist for LPL Financial. A better economy and an accommodating Fed is a nice combo.
The S&P 500 lost 15.71 points to 3385.49. The Dow Jones Industrial average rose 36.78 points, or 0.1%, to 28,032.38. It had previously increased by 369 points. The Nasdaq composite lost 139.85 points, or 1.3%, to 11,050.47.
Small stocks rose more than the rest of the market, and the Russell 2000 Small Cap Index gained 14.17 points, or 0.9%, to 1,552.33.
The market pullback broke a three-day winning streak for the S&P 500, which is down 3.3% so far this month after five consecutive monthly gains.
One of the main reasons Wall Street has reached record highs this year despite the still raging pandemic is the immense help from the Federal Reserve. The central bank has cut short-term rates to near zero and is buying all kinds of bonds to support the markets. Last month, Fed Chairman Jerome Powell presented a new strategy to support even if inflation exceeds its target level.
Don’t fear the Federal Reserve and don’t fear that it will make a policy error that harms economic expansion at any time over the next three years, said Mike Zigmont, director of trade and research at Harvest Volatility Management.
The Fed’s statement today is an assertion to market participants that a risk strategy will continue to be supported by the Fed, said Lindsey Bell, chief investment strategist at Ally Invest. This is evident in their signal that rates could stay low until 2023 and in a reiteration of their shift towards inflation and long-term inflation.
Powell said on Wednesday that the economy has recovered faster than the Fed expected. The Fed has updated its GDP forecast to be 3.7% lower this year from June’s forecast of a 6.5% drop. Regarding employment, the Fed has projected an unemployment rate at the end of the year of 7.6% instead of the 9.3% it projected in June.
Nonetheless, Powell acknowledged that the economic outlook remains highly uncertain and relies heavily on US control of the pandemic.
A full economic recovery is unlikely until people are convinced that it is safe to re-engage in a wide variety of activities, Powell said.
The economy has improved intermittently since the worst of the spring lockdowns. Investors say the economy and the markets still need all the support they can get from the Federal Reserve and Congress.
Federal unemployment benefits and other Congressional economic aids approved earlier this year have expired, and partisan disagreements on Capitol Hill have prevented their renewal.
A report released Wednesday showed retail sales in the United States strengthened less than economists expected last month. Part of the shortfall is probably due to the fact that the unemployed are no longer receiving the $ 600 increase in their weekly checks that came from the federal government.
Tech stocks led the slide on Wednesday, outweighing gains from financial, industrial and energy companies. The pullback in tech stocks marks a reversal from the first two days of this week, when the sector rebounded from a tumultuous two-week sell-off. Gains by major tech stocks contributed to the market’s astonishing rebound this year, taking the S&P 500 to an all-time high on September 2.
FedEx rose 5.8% after reporting stronger earnings growth for the last quarter than analysts had expected. The boom in online shopping caused by the coronavirus pandemic has helped boost its revenue. The company said the growth it expected to see over the next three to five years occurred in just three to five months.
Treasury yields fell after the retail sales report, but edged up after the Fed’s statement. The 10-year Treasury yield rose to 0.69% from 0.68% on Tuesday night.
Earlier, a separate report from the Organization for Economic Co-operation and Development said the global economy was not doing as badly as expected, especially in the United States and China. He predicted the global economy would shrink 4.5% this year, less than the 6% plunge expected in June.
European stock markets mostly ended higher. The German DAX rose by 0.3% and the French CAC 40 by 0.1%. The FTSE 100 in London fell 0.4%. Asian markets ended mixed.
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