The Stock Market Is Rising After Fed Says Tapering May Begin ‘Soon’

Shortly before the closing bell, the

Dow
was up 351 points, or 1%—it had been up 382 points, or 1.1%, about 15 minutes before the announcement. The

S&P 500
was up 0.9%, after being up 1%; the

Nasdaq Composite
was up 0.8%, after being up that much earlier.

The Fed said it would be moving toward a “moderation” because inflation and employment have improved this year.

The central bank had been thought to be considering when to slow, or taper, its Covid-19 pandemic-era program of monthly bond purchases, which add liquidity to markets. Markets want to see that the central bank will taper its purchases—to zero from $120 billion a month—fairly gradually.

The market is expecting the Fed to slow its purchases by about $15 billion a month when the time comes.

There doesn’t seem to be a signal at the moment that the Fed is planning on tapering at a rapid rate. “They’re going to be very measured in their tapering,” says Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence.

Others agree. “The market should feel pretty good that t’s gonna be $15B per month,” says Tom Essaye, founder of Sevens Report Reserch.

Not only is the stock market fairly calm, but so is the bond market. Less money moving into the bond market could lower bond prices and lift their yields, but the 10-year Treasury yield remained at 1.32%, where it had traded for much of the day. This suggests the bond market, too, expects a gradual taper, not a fast one. 

Markets are also tracking when the Fed will lift short-term interest rates. Wednesday’s announcement shows that nine Fed members see a short-term rate hike in 2022, up from seven members in July. The 2-year Treasury yield rose to 0.24% from a low of 0.21%.

Powell did say inflation could remain high in 2022, which could compel the Fed to hike short-term interest rates, potentially slowing down economic growth.

Recently, supply chain constraints have caused some of the inflation. “These effects and the impact on inflation may be more persistent. If needed, the Fed will act as necessary to contain inflation,” writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

But slightly higher expectations for short term interest rates isn’t causing stock investors to worry much about economic growth. Should those worries kick in, the 10-year yield would likely fall hard, forecasting tat the Fed would dent economic growth in future years, Essaye says. “The Fed — they’re not going to do anything to shock the system,” he says.

The U.S. Dollar Index (DXY), which tracks the buck…