The Dow Fell 165 Points Because the Fed Can’t Sit on Its Hands Forever.

The Dow Fell 165 Points Because the Fed Can’t Sit on Its Hands Forever.


Stocks fell Wednesday as the Federal Reserve kept its monetary policy unchanged. Investors expect rising inflation, which can eat into the value of stocks.

 

The Dow Jones Industrial Average fell 164.55 points, or 0.48%, to close at 33,823.38. The S&P 500 slipped 3.54 points, or 0.09%, to end at 4,183.18, and the Nasdaq Composite lost 39.19 points, or 0.28%, to close at 14,051.03 The biggest gainer in the S&P 500 was Nov (ticker: NOV), a supplier of oil-production equipment that saw shares soar 9.6% after its first-quarter earnings report.

 

The Fed said Wednesday that it will maintain the current monetary policy, which supports low-interest rates and borrowing costs, an economic stimulant. The Fed’s news release reiterated that it won’t make a move until the employment rate rises and inflation runs above 2% “for some time.”

 

The central bank will maintain the current size of its bond-purchasing program, and keep the benchmark lending rate at 0%. More money moving into bonds keep their prices high and yields low.

 

Investors still think the Fed will soon be forced to make its policy less accommodative for the economy. Some market observers expect inflation to run hot enough to force the Fed to reduce the size of its bond-buying program sooner rather than later and to hike short-term rates ahead of schedule.

 

, long-term inflation expectations are a tick under 2.4%, the highest expected rate since 2013. Inflation data this year have beaten estimates. Low rates and trillions of fiscal stimulus dollars in circulation are fanning inflation expectations as states reopen.

 

“As long as the Fed policy is data-dependent and investors are forecasting strong data, rate-hike expectations will move higher,” wrote Dennis DeBusschere, head of portfolio strategy research at Evercore, in a research report.

 

Higher bond yields could hurt the stock rally, as demonstrated by Wednesday’s trading action. The 10-year Treasury yield rose to 1.63% and could continue climbing, as it’s still below expected inflation, and investors expect a return higher than inflation. Higher yields make bonds more attractive than stocks, which don’t offer the same safe returns.

 

Meanwhile, the strong economic and earnings growth that comes with higher bond yields have been increasingly reflected in stocks, with the S&P 500 up more than 11% year-to-date, leaving higher yields to put a dent into stocks.

 

Whatever the Fed says, just keep watching inflation.

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