Watch Jerome Powell speak following Fed’s decision to start slowing bond purchases this month

The 10-year Treasury yield has picked up steam as investors digest the Fed statement. The benchmark yield climbed to 1.6% after trading near 1.56% prior to 2 p.m.

-Jesse Pound

“The fact they continue to describe inflation as transitory suggests they’re going to continue to stay lower for longer than many are anticipating,” said Michael Arone of State Street Global Advisors.

-Patti Domm

The Federal Reserve’s policy statement maintained its ‘transitory’ language regarding inflation. Some investors and strategists had speculated that the central bank would drop that language as inflation has remained high.

“Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the statement said.

The language around inflation does differ slightly from prior statements. See how the statement changed this month here.

-Jesse Pound

The equity and fixed income markets showed little initial movement after the Federal Reserve’s policy statement was released. The S&P 500 was little changed, while the 10-year Treasury rate moved slightly higher to 1.572%.

-Jesse Pound

The Federal Reserve revealed its plan to slow its asset purchases starting later this month. The central bank will decrease the current purchases by $15 billion per month in November and December, and said it would likely follow a similar path in the months ahead. The Fed currently has been making roughly $120 billion in purchases per months.

The Fed instituted the asset purchases in March 2020 in attempt to stabilize credit markets during the pandemic-sparked market sell-off. The Fed has kept the purchases steady, ballooning its balance sheet to historic levels, even as the economy has begun to recovery and the markets have stabilized.

-Jesse Pound

The equity markets were relatively calm but mixed shortly before the Fed’s policy announcement at 2 p.m. ET.

The Dow Jones Industrial Average was down 140 points, or 0.4%, while the S&P 500 was off by a modest 0.1%. The tech-heavy Nasdaq Composite was up slightly.

On the fixed income side, the yield on the 10-year Treasury bond was up about 2 basis points for the day at 1.565%. However, the benchmark rate is still well below its recent highs from last month. Yields move inverse of prices, and a basis point is equal to 0.01%.

-Jesse Pound

Bond markets appear to be pricing in the first rate hike as soon as June, but one of Wall Street’s top fixed income investors said the Fed might hold off a few more months.

BlackRock’s Rick Rieder said Monday that he thinks the central bank could do its first rate hike in September.

“I think the market has probably overshot on the amount they are going to do, but I think they are going to raise rates one to two times next year,” Rieder said.

-Jesse Pound, Patti Domm

The Federal Reserve is widely expected to announce its plan to taper asset purchase on Wednesday, with many market watchers saying the monthly purchases should end completely by the middle of 2022.

Investors will be dialed in for clues on the rest of the Fed’s post-crisis plans, including rate hikes and changing language around inflation from Fed Chair Jerome Powell. In recent months, expectations for rate hikes next year have risen sharply while inflation has remained elevated.

“He needs to note that there are risks on both sides. Of course, there are risks that the inflation we’ve seen proves more persistent than they hoped,” said Bill English, a former senior Fed advisor and now a professor at the Yale School of Management. “I’d like to hear him say there are downside risks. Fiscal policy is tightening a lot.”

-Jesse Pound, Jeff Cox