The US stock market bounced back on Thursday after the Federal Reserve indicated that it will start reducing its bond purchases soon and that inflation has likely reached its peak.
Fed signals tapering amid economic recovery
The Fed announced on Wednesday that it will keep its benchmark interest rate near zero, but it also hinted that it will begin to taper its $120 billion monthly asset purchases “soon”, as the economy continues to recover from the pandemic.
The Fed’s bond-buying program has been supporting the financial markets and the economy since March 2020, when the coronavirus crisis hit. However, as the vaccination campaign progresses and consumer spending rebounds, the Fed is preparing to gradually withdraw some of its stimulus.
The Fed also acknowledged that inflation has risen “largely reflecting transitory factors”, and that it expects it to “moderate” in the coming months. The annual inflation rate in the US reached 5.4% in July, the highest level since 2008.
Stocks rally on Fed’s optimism
The stock market reacted positively to the Fed’s announcement, as investors interpreted it as a sign of confidence in the economic outlook and a relief from inflationary pressures.
The Dow Jones Industrial Average rose 0.8% to 35,116 points, while the S&P 500 gained 0.9% to 4,423 points. The Nasdaq Composite climbed 1.1% to 14,761 points, boosted by strong earnings reports from tech giants like Apple, Microsoft and Facebook.
The market sectors that benefited the most from the Fed’s statement were energy, financials and industrials, which are sensitive to economic growth and interest rates. On the other hand, utilities and consumer staples lagged behind, as they tend to perform better when interest rates are low.
What’s next for the market?
The market will be closely watching the upcoming economic data and the Fed’s next moves, as they will determine the pace and timing of the tapering process and the eventual interest rate hikes.
Some of the key indicators that investors will monitor are the monthly jobs report, which will be released on Friday, August 6th, and will show how many jobs were added or lost in July; the consumer price index (CPI), which will be released on Wednesday, August 11th, and will measure the change in the cost of living in July; and the retail sales report, which will be released on Tuesday, August 17th, and will reflect the level of consumer spending in July.
The market will also pay attention to any comments or speeches from Fed officials, especially from Fed Chair Jerome Powell, who will speak at the Jackson Hole Economic Symposium on August 26-28. Powell is expected to provide more details on the Fed’s tapering plans and its views on inflation and growth.