(Bloomberg) — Stocks rose as investors digested the Federal Reserve’s pivot toward tighter monetary policy to combat inflation — with moves already largely priced into the equity market.
The S&P 500 turned higher after initially dropping when the Fed statement came out. Yields on shorter-dated Treasuries jumped, with money markets shifting to price in three quarter-point increases in rates by the end of 2022 as signaled by officials. The new forecasts also showed policy makers see another three hikes in 2023 and two more in 2024 — bringing the funds rate to 2.1% by the end of that year.
“The big question for markets now is: can the U.S. economy digest this pace of hikes without ending up with a stomach ache?,” said Seema Shah, chief strategist at Principal Global Investors. “After the 20 months we’ve had, perhaps six hikes over a two-year period looks overwhelming. But compared to previous hiking cycles — most pertinently 2004 to 2006 when the Fed made 17 consecutive hikes — we are tentatively confident that the U.S. economy can handle it. Not only that, but U.S. inflation needs it.”
The Fed will also double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.
Read: Federal Reserve’s Reverse Repo Use Hits Record $1.62 Trillion
A key gauge in the bond market that measures the gap between yields on inflation-adjusted Treasuries and those on regular securities suggests the Fed will be challenged to get inflation down toward its 2% target. The five-year breakeven rate — which hit a record high last month — is currently around 2.7%.
Some corporate highlights:
- Lowe’s Cos. delivered a revenue outlook that missed analyst estimates and said it expects home-improvement demand to slow next year.
- Eli Lilly & Co. raised its 2021 earnings and revenue forecast and said it expects 2022 sales in a range of $27.8 billion and $28.3 billion, sending shares up the most since June.
Investors also monitored the latest developments on the omicron coronavirus variant. Anthony Fauci, who serves as a medical adviser to President Joe Biden, said on a briefing Wednesday that studies so far show strong antibody responses from existing boosters, though protections against omicron are weaker with just two doses. The strain could make up about 13% of Covid-19 cases in New York and New Jersey, projections from the Centers for Disease Control and Prevention show.
Read: U.K. Covid Cases Hit Record High as Omicron Outbreak Accelerates
Here are some key events this week:
- BOE rate decision, Thursday.
- ECB rate decision, Thursday.
- U.S. housing starts, initial jobless claims, industrial production, Thursday.
- BOJ monetary policy decision, Friday.
- S&P Dow Jones Indices quarterly rebalance effective after markets close, Friday.
- “Quadruple witching” day in the U.S. market, when options and futures on indexes and equities expire, Friday.
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.4% as of 2:56 p.m. New York time
- The Nasdaq 100 rose 0.5%
- The Dow Jones Industrial Average rose 0.2%
- The MSCI World index rose 0.2%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1270
- The British pound was little changed at $1.3235
- The Japanese yen fell 0.3% to 114.08 per dollar
Bonds
- The yield on 10-year Treasuries advanced two basis points to 1.46%
- Germany’s 10-year yield was little changed at -0.36%
- Britain’s 10-year yield advanced one basis point to 0.74%
Commodities
- West Texas Intermediate crude rose 0.4% to $71.01 a barrel
- Gold futures fell 0.3% to $1,767.80 an ounce
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