Fed to Begin Unwinding, Signals Another Hike.

U.S. equities finished mixed, rebounding from a brief tumble that came after the Fed left rates unchanged, as expected, but signaled a December hike is likely to be in the cards. Treasury yields rose following the Fed decision, which included insight into the winding down of its behemoth balance sheet, while the U.S. dollar jumped and gold reversed to the downside. Meanwhile, crude oil prices rose following a mixed government oil inventory report and U.S. existing home sales unexpectedly dropped.

The Dow Jones Industrial Average (DJIA) increased 42 points (0.2%) to 22,413, the S&P 500 Index gained 2 points (0.1%) to 2,508, while the Nasdaq Composite declined 5 points (0.1%) to 6,456. In moderate volume, 837 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.79 to $50.69 per barrel and wholesale gasoline was unchanged at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price decreased $10.39 to $1,300.76 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% higher at 92.49.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, agreeing to keep the target for its fed funds rate steady at a range of 1.00%-1.25%, a move that was widely expected. The FOMC also kept its near-term rate outlook intact, with 12 of 16 Committee members projecting at least one additional rate increase for 2017, but it lowered its longer-term outlook, indicating 11 of 16 Members forecasted three hikes in 2018. In its statement, the FOMC said that near-term risks to the economy are “roughly balanced,” that the labor market continues to be strong, and that the Committee “is monitoring inflation developments closely.” In regards to the recent hurricanes, the Fed indicated that “disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.” In a separate statement, the Fed also provided details of its plan to begin to wind down its $4.5 trillion balance sheet. In a unanimous decision, the Fed will begin to taper its balance sheet by $10 billion per month—$6 billion from Treasuries and $4 billion from mortgage-backed securities—increasing by $10 billion per month every quarter for the first year.

As well, the Fed provided updated economic projections, showing a slight upward change to gross domestic product for this year, while lowering its forecasts for inflation and keeping its the unemployment rate expectations the same. In her press conference following the decision, Fed Chairwoman Janet Yellen said that she is heartened by the labor market improvement and expects the economy to expand at a moderate pace, but that the Committee is prepared to act if the economy begins to deteriorate.

The MBA Mortgage Application Index dropped 9.7% last week, giving back most of the previous week’s 9.9% jump. The fall came as an 8.5% drop in the Refinance Index was met with a 10.8% tumble for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.04%.

Treasuries finished mostly lower, as the yield on the 2-year note rose 3 bps to 1.44%, the yield on the 10-year note gained 2 bps to 2.27%, and the 30-year bond rate was flat at 2.82%.

Tomorrow’s economic calendar will begin with weekly initial jobless claims, which are forecasted to have moved higher to a level of 302,000 from the prior week’s 284,000, as well as the Philly Fed Manufacturing Index, with economists anticipating a reading of 17.1 for September following August’s 18.9, and culminating with the Index of Leading Economic Indicators (LEI) for August, anticipated to match July’s 0.3% m/m increase.

Schwab Center for Financial Research – Market Analysis Group

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