By Mark DeCambre and Sara Sjolin, MarketWatch
Dollar jumps to 2-week high as Federal Reserve says it will
start asset reduction next month
U.S. stock benchmarks retreated modestly Wednesday afternoon as
the Federal Reserve announced that, for the first time in nine
years, it would start reducing the size of its $4.5 trillion asset
portfolio starting in October.
The U.S. central bank kept interest rates unchanged, as widely
expected, but said it would start to shrink its balance sheet by
$10 billion a month. The Fed also signaled a December rate increase
remains on the table as the central bank embarks on an
unprecedented unwind of crisis-era asset purchase that had helped
to buoy markets over the past decade.
During a news conference to detail its policy plans, Yellen
described the unwind would be conducted "gradually and
predictably."
Check out:A live blog of the Fed's news conference
(http://blogs.marketwatch.com/capitolreport/2017/09/20/fed-decision-and-janet-yellen-press-conference-live-blog-and-video-2/)
"Even though this is a slow and deliberate and thoughtful unwind
plan, it is not without its potential to rattle markets," said
Kristina Hooper, global market strategist at Invesco.
The Dow Jones Industrial Average was up 10 points, or 0.1%, at
22,379, after hitting a fresh intraday record at 22,399.33.
The S&P 500 index was down less than a point at 2,504, after
briefly touching its own fresh intraday day record at 2,508.85.
The Nasdaq Composite Index , meanwhile, was down 12 points, or
0.2%, at 6,448.
The Fed committed to reducing the bonds they own at a pace of
$10 billion a month and increasing that pace by $10 billion every
three months to a maximum pace of $50 billion a month or $600
billion a year.
Meanwhile, 10-year Treasury note yield jumped to 2.28%, compared
with 2.23% earlier in the session, with expectations for higher
rates and additional monetary tightening, via the portfolio
decrease, encouraging selling in government bonds, pushing yields,
which move in the opposite direction to prices, higher. The dollar,
which draws bidders in a higher interest-rate regime, enjoyed a
fillip, up 0.7% at 92.475, based on the ICE U.S. Dollar Index ,
which measures the buck against a half-dozen currencies.
Read:Why stock market investors shouldn't sweat a shrinking Fed
balance sheet
(http://www.marketwatch.com/story/why-stock-market-investors-shouldnt-sweat-a-shrinking-fed-balance-sheet-2017-09-19)
The Fed kept its targeted federal-funds rate between 1% to
1.25%, and said the devastation caused by Hurricanes Harvey and
Irma isn't likely to materially alter the course of the economy
over the medium term.
The Fed's interest-rate projections, known as the so-called dot
plot, suggests an interest-rate hike in December and three more in
2018.
Some industry participants have been describing the asset
reduction as the "great unwind
(http://www.marketwatch.com/story/how-the-great-central-bank-unwind-could-ignite-the-next-financial-crisis-2017-09-20)"
and worrying that it might roil markets. "It is the start of
something unknown, it is going to start jitters. It is going to
make us tremble," said John Manley, chief equity strategist at
Wells Fargo Funds Management.
However, the Fed is aiming to offer as little disruption as
possible, he noted.
"I'll admit that it feels a little surreal that this Federal
Reserve with its addiction to manipulating markets is actually
trying to kick the habit. The unwinding of the balance sheet will
dominate markets for at least the next two years and cements our
outlook for higher rates," said Bryce Doty, senior portfolio
manager at SIT Investments, which manages some $7 billion.
Yellen emphasized, during the news conference, that the central
bank was monitory stubbornly low inflation closely, with an eye
toward seeing it return to its 2% annual target. Inflation has been
kept in check despite an otherwise healthy labor market that should
theoretically lift prices and inflation. The Fed chief said policy
makers are aware of the risk of prices suddenly jolting higher: "We
want to be careful not to allow the economy to overheat to
somewhere later on to have to have tighten monetary policy rapidly
and...cause a recession."
Several central-bank officials already wanted to start winding
down the Fed's portfolio of government securities in July, but the
majority wanted to hold until a later date. Traders now expect the
FOMC on Wednesday to reveal details on a balance-sheet reduction
(http://www.marketwatch.com/story/feds-balance-sheet-unwind-will-be-moment-of-truth-for-financial-markets-2017-09-18)
that could start as early as October.
In other economic news on Wednesday, a reading on existing-home
sales for August showed that sales dropped for the fourth time in
five months as real-estate agents continue to blame a lack of
available homes to buy. The National Association of Realtors said
existing home sales fell
(http://www.marketwatch.com/story/existing-home-sales-fall-in-august-for-the-fourth-time-in-five-months-2017-09-20)1.7%
to a seasonally adjusted rate of 5.35 million.
See:MarketWatch's economic calendar
(http://www.marketwatch.com/economy-politics/calendars/economic).
Stock movers: Shares of General Mills Inc.(GIS) slid 5% after
the food company, which brands include Cheerios, Haagen-Dazs and
Betty Crocker, missed profit and sales expectations
(http://www.marketwatch.com/story/general-mills-stock-tumbles-after-profit-and-sales-miss-2017-09-20).
Alnylam Pharmaceuticals Inc. (ALNY) soared 40% after positive
results in a late-stage trial
(http://www.marketwatch.com/story/sanofi-alnylam-report-positive-results-from-late-stage-trial-of-hattr-amyloidosis-treatment-2017-09-20).
Shares of American Outdoor Brands Corp.(AOBC) declined 3.6%,
despite reports late Tuesday that President Donald Trump will ease
rules on gun exports.
Bed Bath & Beyond Inc.(BBBY) slumped more than 14% after the
retailer late on Tuesday released earnings that widely missed
forecasts
(http://www.marketwatch.com/story/bed-bath-beyond-earnings-miss-widely-stock-halted-2017-09-19).
FedEx Corp.(FDX) added 2.2% after the logistics company late
Tuesday reported earnings below forecasts
(http://www.marketwatch.com/story/fedex-shares-down-after-earnings-company-pins-miss-on-cyberattack-hurricane-harvey-2017-09-19),
saying the quarter offered "significantly operational challenges"
due to a cyberattack and Hurricane Harvey.
Microsoft Corp. (MSFT) slipped less than 0.8%, even as the
software major late Tuesday increased its dividend to 42 cents a
share
(http://www.marketwatch.com/story/microsoft-hikes-quarterly-dividend-announces-changes-to-board-of-directors-2017-09-19).
Other markets: Stocks in Europe were mostly higher, although the
U.K.'s FTSE 100 index
(http://www.marketwatch.com/story/ftse-100-edges-up-as-fed-decision-takes-center-stage-2017-09-20)underperformed
due to a rise in the pound. Sterling strengthened after U.K. retail
sales for August showed a bigger rise than expected
(http://www.marketwatch.com/story/uk-retail-sales-rise-faster-than-expected-2017-09-20).
Asian stocks closed mixed
(http://www.marketwatch.com/story/asian-markets-press-pause-ahead-of-fed-announcement-2017-09-19)
as traders there remained cautious ahead of the Fed call.
Crude-oil prices rose firmly
(http://www.marketwatch.com/story/crude-prices-rise-on-signs-of-drop-in-global-inventories-2017-09-20)
to $50.81 a barrel, while metals gained across the board, with gold
futures trading at around $1,305 an ounce, falling in electronic
trade after the Fed announcement.
(http://www.marketwatch.com/story/gold-prices-pause-losing-skid-as-fed-signals-awaited-2017-09-20)
(END) Dow Jones Newswires
September 20, 2017 15:37 ET (19:37 GMT)
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