The Federal Reserve on Wednesday unveiled its plan to slow asset purchases implemented during the pandemic beginning this month. In a press conference after the announcement, Fed Chair Jerome Powell emphasized that the end of the bond buying would not mean a rush to raise interest rates. Stocks and bond yields rose after the news.
Here's a recap of what happened with real-time market insight...
Powell's press conference ends
The Fed Chair wrapped up his press conference after nearly an hour. The S&P 500 is trading up 0.5% for the session, while the 10-year Treasury yield is just under 1.6%.
Powell says he asked Inspector General to check if Fed trades broke law
Powell said that the Fed is working to reform its rules on if and how its senior officials can own and trade securities, and added that he's asked the Inspector General if any central bank leaders broke the law when they traded equities during the Covid-19 pandemic last year.
"The ethics system that had been in place for decades and had – as far as we know – served us well. And then that was no longer the case. So, we had no moment of denial about that," he said.
His remarks come weeks after trading by regional Fed presidents drew scrutiny from both Washington and Wall Street. Both Robert Kaplan, formerly of the Dallas Fed, and Eric Rosengren, formerly of the Boston Fed, resigned last month amid the fallout.
Powell said he has asked the Inspector General to handle the investigation, that he won't speculate on its outcome and that it's no longer in his hands.
"As a group, we stepped in and we took the actions that we took. And, you know, within one FOMC cycle we announced a new set of rules to try to put us back where we need to be. Which is, we need to have the complete trust of the American people, that we're working in their interest all the time."
— Thomas Franck
Small cap stocks jump
The Russell 2000 is up nearly 2% for the session, apparently bolstered by economic confidence from the Federal Reserve.
"They're [stocks] all up, but the small caps have jumped the most," said Michael Arone of State Street Global Advisors. "The Russell 2000 is the clear winner and it is consistent with past periods where tapering has started. It is a sign of confidence. The Fed wouldn't be tapering if the Fed was expecting something to go awry with the economy. They are signaling they expect thigs to rebound. Small cap stocks are typically correlated with rises in interest rates. "
-Jesse Pound, Patti Domm
Powell says Fed is not 'behind the curve' in addressing inflation
When asked about the Fed's pace in addressing inflation, Chair Jerome Powell said the central bank is changing monetary policy appropriately.
"I don't think that we're behind the curve. I actually believe that policy is well-positioned to address the range of plausible outcomes, and that's what we need to do," Powell said.
Powell said there is "still ground to cover" in the labor market recovery to reach "maximum employment."
"Our policy will continue to adapt as is appropriate," Powell said.
— Hannah Miao
Powell says people have different understandings of 'transitory'
Federal Reserve Jerome Powell said that in Wednesday's statement the central bank took a step back from the word "transitory," which it had been using to describe the impact of inflation, due in part to confusion around various understandings of the term.
"Transitory is a word that has had different understandings," he said. "For some, it carries a sense of short-lived. There's a real time component, measured in months, let's say. Really for us, what transitory has meant is that if something is transitory it will not leave behind permanently – or very persistently higher – inflation. So that's why we took a step back from transitory. We said 'expected to be transitory.'"
Powell also said the current level of inflation is not consistent with price stability and that the central bank would "use our tools as appropriate to get inflation under control."
— Tanaya Macheel
Stocks move higher
Stocks have started to climb as Powell's press conference continues. The Dow is up 77 points, while the S&P 500 is up 0.5% while the Nasdaq Composite leads with a gain of 0.8%.
Powell says inflation is not caused by tight labor market, does not see signs of wage-price spiral
Fed Chair Jerome Powell said at a press conference that current elevated prices in the U.S. are not caused by a tight labor supply.
"The inflation that we're seeing is really not due to a tight labor market. It's due to bottlenecks and it's due to shortages and it's due to very strong demand meeting those," Powell said.
Regarding a rise in wages as companies struggle to fill open job positions, Powell does not see signs of a wage-price spiral, when prices rise as a result of higher wages.
"We don't see troubling increases in wages, and we don't expect those to emerge," Powell said.
— Hannah Miao
Powell says there's still ground to cover to reach maximum employment
Federal Reserve Jerome Powell said there's further ground to cover before reaching maximum employment, one of the policy goals of the central bank and a major hurdle before raising rates.
The focus of this week's meeting isn't on raising rates, but on tapering, he added.
"It is time to taper we think because the economy has achieved substantial further progress toward our goals measured for last December," Powell said. "We don't think it's time yet to raise interest rates. There is still ground to cover to reach maximum employment both in terms of employment and terms of participation."
— Tanaya Macheel
Powell says Fed decision to taper does not imply a change to interest rate policy
"Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate," Federal Reserve Chairman Jerome Powell said his post-meeting news conference Wednesday afternoon.
Powell says tapering could be changed in either direction
Powell clarified that the rate of the Fed taper could change in either direction after December.
"We are prepared to speed up or slow down" the asset purchase changes, he said.
Powell says timing of supply chains' return to normal is 'highly uncertain'
Federal Reserve Jerome Powell said it's very difficult to gauge when the supply chain constraints will resolve themselves.
"Of course it is very difficult to predict the persistence of the supply chain constraints or their effects on inflation. Global supply chains are complex. They will return to normal function but the timing of that is highly uncertain," the central bank chief said in a press conference.
Powell said the Fed will use its tools to fight inflation if price pressures stay higher for longer.
"If we were to see signs of the path of inflation, or longer-term inflation expectations, was moving materially and persistently beyond levels constant with our goals, we will use our tools to preserve price stability," Powell said.
— Yun Li
Former Fed governor says central bankers are 'behind the curve'
"I think the Federal Reserve is behind the curve. They are starting to reduce the taper a little bit. There shouldn't be any purchase of mortgage bank securities in this booming housing market and the U.S. government doesn't need any support either. So the Fed is behind the curve, I'm glad they finally did what they [did]," former Fed governor Robert Heller told CNBC's "Power Lunch."
"I would reduce the asset purchases very quickly, within two months or something like that — have it down to zero, and the policy rate I would start to lift right at the beginning of the year to get it back to a normal policy stance," Heller said.
Fed's inflation stance criticized
"There remains quite a disconnect between the reality that I see and what I believe most Americans are experiencing, both households and businesses and what the Fed sees to the point that it seems like the September FOMC statement was not updated for today," said Peter Boockvar of Bleakley Advisory Group.
Powell's presser begins
Fed Chair Jerome Powell has taken the stage to start his press conference. The S&P 500 is up by 0.1%, and the 10-year Treasury yield is trading just below 1.6%.
J.P. Morgan's Kelly believes Fed will wait until very end of 2022 to hike
"I don't expect a rate hike in July or in September, what I think they're trying to do is draw space between when they're done with tapering (and) when they start tightening because they've always tried to say these are two distinct things," said David Kelly, chief global strategist of J.P. Morgan Asset Management.
"I think this means that they're going to wait until the last meeting of 2022 just like they did in the last decade ... to actually put in rate hikes."
10-year Treasury yield hits 1.6%
The 10-year Treasury yield has picked up steam as investors digest the Fed statement. The benchmark yield climbed to 1.6% after trading near 1.56% prior to 2 p.m.
Fed signaling they will be in no rush to raise rates
"The fact they continue to describe inflation as transitory suggests they're going to continue to stay lower for longer than many are anticipating," said Michael Arone of State Street Global Advisors.
Fed keeps 'transitory' language in statement
The Federal Reserve's policy statement maintained its 'transitory' language regarding inflation. Some investors and strategists had speculated that the central bank would drop that language as inflation has remained high.
"Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors," the statement said.
The language around inflation does differ slightly from prior statements. See how the statement changed this month here.
Markets steady after Fed announcement
The equity and fixed income markets showed little initial movement after the Federal Reserve's policy statement was released. The S&P 500 was little changed, while the 10-year Treasury rate moved slightly higher to 1.572%.
Fed announces taper plan for asset purchases
The Federal Reserve revealed its plan to slow its asset purchases starting later this month. The central bank will decrease the current purchases by $15 billion per month in November and December, and said it would likely follow a similar path in the months ahead. The Fed currently has been making roughly $120 billion in purchases per months.
The Fed instituted the asset purchases in March 2020 in attempt to stabilize credit markets during the pandemic-sparked market sell-off. The Fed has kept the purchases steady, ballooning its balance sheet to historic levels, even as the economy has begun to recovery and the markets have stabilized.
Dow down 100 points ahead of Fed announcement
The equity markets were relatively calm but mixed shortly before the Fed's policy announcement at 2 p.m. ET.
The Dow Jones Industrial Average was down 140 points, or 0.4%, while the S&P 500 was off by a modest 0.1%. The tech-heavy Nasdaq Composite was up slightly.
On the fixed income side, the yield on the 10-year Treasury bond was up about 2 basis points for the day at 1.565%. However, the benchmark rate is still well below its recent highs from last month. Yields move inverse of prices, and a basis point is equal to 0.01%.
First rate hike in September, BlackRock's Rieder predicts
Bond markets appear to be pricing in the first rate hike as soon as June, but one of Wall Street's top fixed income investors said the Fed might hold off a few more months.
BlackRock's Rick Rieder said Monday that he thinks the central bank could do its first rate hike in September.
"I think the market has probably overshot on the amount they are going to do, but I think they are going to raise rates one to two times next year," Rieder said.
-Jesse Pound, Patti Domm
Market looking for next steps beyond the taper
The Federal Reserve is widely expected to announce its plan to taper asset purchase on Wednesday, with many market watchers saying the monthly purchases should end completely by the middle of 2022.
Investors will be dialed in for clues on the rest of the Fed's post-crisis plans, including rate hikes and changing language around inflation from Fed Chair Jerome Powell. In recent months, expectations for rate hikes next year have risen sharply while inflation has remained elevated.
"He needs to note that there are risks on both sides. Of course, there are risks that the inflation we've seen proves more persistent than they hoped," said Bill English, a former senior Fed advisor and now a professor at the Yale School of Management. "I'd like to hear him say there are downside risks. Fiscal policy is tightening a lot."
-Jesse Pound, Jeff Cox