Stocks,Treasury Yields Tumble after Powell Says He Does Not See Inflation Surprising to Upside

The major U.S. stock indexes finished lower on Wednesday, giving up earlier gains, as investors reacted negatively to comments from Federal Reserve Chair Jerome Powell. The Fed also raised its benchmark interest rate for a third time this year as widely expected. However, the monetary policy statement drove interest rates lower, dragging down bank stocks.

In the cash market, the benchmark S&P 500 Index settled at 2905.97, down 9.59 or -0.33%. The blue chip Dow Jones Industrial Average closed at 26385.28, down 106.93 or -0.40% and the tech-based NASDAQ Composite ended the session at 7988.39, down 19.08 or -0.24%.

The initial reaction to the rate hike and the monetary policy statement was relatively flat since the Fed delivered what investors expected. The selling pressure started during Powell’s press conference shortly after the early announcements when the Chairman said he does not see inflation surprising to the upside, noting:  “It’s not in our forecasts.”

The dovish comment sent interest rates lower, along with bank stocks. The 10-year Treasury note yield fell to 3.06 percent. Shares of J.P. Morgan Chase, Bank of America and Citigroup all dropped more than 1 percent. The SPDR S&P Bank ETF (KBE) dropped 2 percent.

To recap Wednesday’s key events:  The Fed raised its target overnight rate to a range of 2 percent to 2.25 percent, up from 1.75 percent to 2 percent. The central bank also upped their outlook for U.S. economic growth this year and next. Finally, the Fed dropped the word “accommodative” from its statement in how it describes its monetary policy.

That move raised the most questions with some traders saying this likely means that the Fed no longer believes its policy is accommodative, and it’s likely closer to being done with its rate hikes. The initial price action suggested the market first interpreted the word’s removal as “the end of the Fed tightening cycle.” However, Powell said the removal of that word does not signal any change in the bank’s path toward normalizing monetary policy.

U.S. Treasury Markets

The same comments from Fed Chair Powell that drove stocks lower for the session also fueled a tumble in U.S. government debt yields. Rates fell late in the session on Wednesday after Powell said he does not see a buildup in fundamental inflation and does not anticipate prices surprising to the upside.

“The main thing where we might need to move along a little bit quicker if inflation surprises to the upside. We don’t see that,” Powell told reporters during his quarterly news conference Wednesday.

The yield on the benchmark 10-year Treasury note was lower at 3.05 percent, while the yield on the 30-year Treasury bond settled lower at 3.183 percent.

The Wrap-Up

Over the near-term, or perhaps even extending to its next major meeting in December, traders are likely to continue to try to interpret the meaning of the removal of the word “accommodative”. Despite what Fed Chair Powell said it means, there are some traders who believe the Fed issued a dovish statement because it dropped the word. Furthermore, they claim without accommodation, there’s no preset path of rate hikes and every decision becomes a toss-up.