Commuters exit a subway station on Wall Street near the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images
Futures contracts, which are pegged to major U.S. stock indices, rose at the start of the overnight session on Wednesday night after the Federal Reserve announced hours earlier that it currently does not expect any rate hikes through 2023.
Fed chairman Jerome Powell reiterated that the central bank would like to see inflation constant above its 2% target and a substantial improvement in the US labor market before considering rate changes or monthly bond purchases.
Dow futures rose 45 points, suggesting a gain of a similar magnitude if regular trading resumes on Thursday. S&P 500 and Nasdaq 100 futures were up 0.15%.
The key message from Wednesday’s Fed meeting is, “The committee expects it will be extremely accommodative in the long run, even if the economic outlook improves,” wrote Eric Winograd, senior economist at AB.
“The FOMC shares the market’s view that growth and inflation are expected to rebound if activity increases in 2021, but it does not see this surge in activity as permanent,” he added.
The post-hour moves come after a late stock market pop during Powell’s remarks.
The upswing brought the Dow Jones Industrial Average up 189 points to its first closing price of over 33,000. The S&P 500 also saw a record close, rising 0.3% to 3,974 after falling 0.7% earlier Wednesday.
The Nasdaq Composite, down as much as 1.5%, erased its early losses and ended the day 0.4% higher at 13,525.20. The tech-heavy benchmark came under pressure Wednesday morning as rising bond yields weighed on growth stocks.
Announcements by the Fed and its leader dictated trading Wednesday after the Fed improved its economic outlook to reflect expectations for a stronger recovery, while allaying investor concerns that it might abandon its easy monetary policy earlier than expected.
The Fed expects gross domestic product to grow 6.5% in 2021 before cooling off in later years and inflation to rise 2.2% this year as measured by personal consumption expenditure. The central bank’s stated goal is to keep inflation at 2% over the long term.
However, Powell managed to convince traders that the Fed needs to see a substantial and sustained rise in prices and a sharp fall in unemployment before debating any changes to its current loose political stance.
The Fed expects to continue its loose monetary policy “for a few quarters, leave the key rate at zero for the foreseeable future and keep the key rate well below neutral for several years,” added Winograd from AB. “This is an extraordinarily long period of extremely accommodative politics.”
The 10-year government bond yield peaked after the central bank update. The rate was last seen at 1.646%. At the beginning of the meeting, the key interest rate rose to 1.689% and reached a level not seen since the end of January 2020.
Higher interest rates have been particularly bad for growth companies as they undermine the value of future cash flows.
Tesla, for example, was down 3.8% on the Wednesday prior to the Fed’s announcement to track the rise in long-term interest rates. The stock burst on the Fed’s release, ending the session 3.6% as yields fell.