If you look at the Dow’s performance today, something moved the market in a big way right around 2:00 PM EST. The major indices started the trading day on a strong foot, trending higher through mid-afternoon when something clearly spooked investors. In a matter of minutes, the gains from the day were nearly wiped out. What happened to cause such a commotion on Wall Street?
Well, this afternoon the Federal Open Market Committee (FOMC) unveiled its latest policy decision regarding its ongoing bond purchasing program, known officially as Quantitative Easing. We had known from earlier reports that the FOMC reduced its monthly asset purchases by $10 billion to $25 billion. Over the past several months the Fed has incrementally tapered by $10 billion each month, so this is pretty much standard practice by now.
The big news is that the Fed now appears to be considering whether to increase interest rates sooner rather than later. For the past several years the Fed has kept interest rates near zero, and investors are preoccupied with when rates will finally rise again.
As I’ve explained in previous blog posts, the accommodative Fed policy is a boon for the stock market. The ultra-low interest rates allow corporations to borrow very cheaply on the bond market and then use those proceeds to buy back their stock. And when companies buy back their stock this boosts earnings per share and oftentimes share prices.
So while the Fed plans to continue to be accommodative in the near-term, more in the Fed appear to favor increasing rates. We will likely get more hints on the Fed’s official timeline when Chairwoman Janet Yellen appears at the Jackson Hole central bankers meeting on Friday morning. I’ll continue to keep a close watch on these signals and report back to you in this daily blog.