MARKET SNAPSHOT: Stock Market Weakens As Fed Announces October Start To 'great Unwind'

By Mark DeCambre and Sara Sjolin, MarketWatch Features Dow Jones Newswires

Dollar jumps to 2-week high as Federal Reserve says it will start asset reduction next month

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U.S. stock benchmarks retreated modestly Wednesday afternoon as the Federal Reserve announced that, for the first time in nine years, it would start reducing the size of its $4.5 trillion asset portfolio starting in October.

The U.S. central bank kept interest rates unchanged, as widely expected, but said it would start to shrink its balance sheet by $10 billion a month. The Fed also signaled a December rate increase remains on the table as the central bank embarks on an unprecedented unwind of crisis-era asset purchases that had helped to buoy markets over the past decade.

During a news conference to detail its policy plans, Yellen described the unwind would be conducted "gradually and predictably."

Check out:A live blog of the Fed's news conference (http://blogs.marketwatch.com/capitolreport/2017/09/20/fed-decision-and-janet-yellen-press-conference-live-blog-and-video-2/)

"Even though this is a slow and deliberate and thoughtful unwind plan, it is not without its potential to rattle markets," said Kristina Hooper, global market strategist at Invesco.

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The Dow Jones Industrial Average was up 10 points, or 0.1%, at 22,379, after hitting a fresh intraday record at 22,399.33.

The S&P 500 index was down 3 points, or 0.1%, at 2,504, after briefly touching its own fresh intraday day record at 2,508.85.

The Nasdaq Composite Index , meanwhile, was down a firmer 22 points, or 0.2%, at 6,439.

The Fed committed to reducing the bonds they own at a pace of $10 billion a month and increasing that pace by $10 billion every three months to a maximum pace of $50 billion a month or $600 billion a year.

Meanwhile, 10-year Treasury note yield jumped to 2.28%, compared with 2.23% earlier in the session, with expectations for higher rates and additional monetary tightening, via the portfolio decrease, encouraging selling in government bonds, pushing yields, which move in the opposite direction to prices, higher. The dollar, which draws bidders in a higher interest-rate regime, enjoyed a fillip, up 0.7% at 92.475, based on the ICE U.S. Dollar Index , which measures the buck against a half-dozen currencies.

Read:Why stock market investors shouldn't sweat a shrinking Fed balance sheet (http://www.marketwatch.com/story/why-stock-market-investors-shouldnt-sweat-a-shrinking-fed-balance-sheet-2017-09-19)

The Fed kept its targeted federal-funds rate between 1% to 1.25%, and said the devastation caused by Hurricanes Harvey and Irma isn't likely to materially alter the course of the economy over the medium term.

The Fed's interest-rate projections, known as the so-called dot plot, suggests an interest-rate hike in December and three more in 2018.

Some industry participants have been describing the asset reduction as the "great unwind (http://www.marketwatch.com/story/how-the-great-central-bank-unwind-could-ignite-the-next-financial-crisis-2017-09-20)" and worrying that it might roil markets. "It is the start of something unknown, it is going to start jitters. It is going to make us tremble," said John Manley, chief equity strategist at Wells Fargo Funds Management.

However, the Fed is aiming to offer as little disruption as possible, he noted.

"I'll admit that it feels a little surreal that this Federal Reserve with its addiction to manipulating markets is actually trying to kick the habit. The unwinding of the balance sheet will dominate markets for at least the next two years and cements our outlook for higher rates," said Bryce Doty, senior portfolio manager at SIT Investments, which manages some $7 billion.

Yellen emphasized, during the news conference, that the central bank was monitory stubbornly low inflation closely, with an eye toward seeing it return to its 2% annual target. Inflation has been kept in check despite an otherwise healthy labor market that should theoretically lift prices and inflation. The Fed chief said policy makers are aware of the risk of prices suddenly jolting higher: "We want to be careful not to allow the economy to overheat to somewhere later on to have to have tighten monetary policy rapidly and...cause a recession."

Several central-bank officials already wanted to start winding down the Fed's portfolio of government securities in July, but the majority wanted to hold until a later date. Traders now expect the FOMC on Wednesday to reveal details on a balance-sheet reduction (http://www.marketwatch.com/story/feds-balance-sheet-unwind-will-be-moment-of-truth-for-financial-markets-2017-09-18) that could start as early as October.

In other economic news on Wednesday, a reading on existing-home sales for August showed that sales dropped for the fourth time in five months as real-estate agents continue to blame a lack of available homes to buy. The National Association of Realtors said existing home sales fell (http://www.marketwatch.com/story/existing-home-sales-fall-in-august-for-the-fourth-time-in-five-months-2017-09-20)1.7% to a seasonally adjusted rate of 5.35 million.

See:MarketWatch's economic calendar (http://www.marketwatch.com/economy-politics/calendars/economic).

Stock movers: Shares of General Mills Inc.(GIS) slid 5% after the food company, which brands include Cheerios, Haagen-Dazs and Betty Crocker, missed profit and sales expectations (http://www.marketwatch.com/story/general-mills-stock-tumbles-after-profit-and-sales-miss-2017-09-20).

Alnylam Pharmaceuticals Inc. (ALNY) soared 40% after positive results in a late-stage trial (http://www.marketwatch.com/story/sanofi-alnylam-report-positive-results-from-late-stage-trial-of-hattr-amyloidosis-treatment-2017-09-20).

Shares of American Outdoor Brands Corp.(AOBC) declined 3.6%, despite reports late Tuesday that President Donald Trump will ease rules on gun exports.

Bed Bath & Beyond Inc.(BBBY) slumped more than 14% after the retailer late on Tuesday released earnings that widely missed forecasts (http://www.marketwatch.com/story/bed-bath-beyond-earnings-miss-widely-stock-halted-2017-09-19).

FedEx Corp.(FDX) added 2.2% after the logistics company late Tuesday reported earnings below forecasts (http://www.marketwatch.com/story/fedex-shares-down-after-earnings-company-pins-miss-on-cyberattack-hurricane-harvey-2017-09-19), saying the quarter offered "significantly operational challenges" due to a cyberattack and Hurricane Harvey.

Microsoft Corp. (MSFT) slipped less than 0.8%, even as the software major late Tuesday increased its dividend to 42 cents a share (http://www.marketwatch.com/story/microsoft-hikes-quarterly-dividend-announces-changes-to-board-of-directors-2017-09-19).

Other markets: Stocks in Europe were mostly higher, although the U.K.'s FTSE 100 index (http://www.marketwatch.com/story/ftse-100-edges-up-as-fed-decision-takes-center-stage-2017-09-20)underperformed due to a rise in the pound. Sterling strengthened after U.K. retail sales for August showed a bigger rise than expected (http://www.marketwatch.com/story/uk-retail-sales-rise-faster-than-expected-2017-09-20).

Asian stocks closed mixed (http://www.marketwatch.com/story/asian-markets-press-pause-ahead-of-fed-announcement-2017-09-19) as traders there remained cautious ahead of the Fed call.

Crude-oil prices rose firmly (http://www.marketwatch.com/story/crude-prices-rise-on-signs-of-drop-in-global-inventories-2017-09-20) to $50.81 a barrel, while metals gained across the board, with gold futures trading at around $1,305 an ounce, falling in electronic trade after the Fed announcement. (http://www.marketwatch.com/story/gold-prices-pause-losing-skid-as-fed-signals-awaited-2017-09-20)

(END) Dow Jones Newswires

September 20, 2017 15:08 ET (19:08 GMT)