Stocks rise as Fed unwinds portfolio, sets up December rate hike

Stocks rose Wednesday after the Federal Reserve continued to hint that it will raise interest rates in December.

The Dow Jones Industrial Average climbed 41 points, or 0.2%, to 22,412. The S&P 500 edged 1.6 points higher, or 0.06%, to 2,508. The Nasdaq Composite dropped 5.3 points, or 0.08%, to 6,456. The Dow and S&P closed at fresh all-time highs.

The Fed, which concluded its two-day policy meeting Wednesday, moved forward with a widely anticipated plan to shrink its $4.5 trillion balance sheet beginning in October. Officials previously announced that the central bank would begin by allowing up to $6 billion worth of government bonds and $4 billion in mortgage-backed securities to roll off its balance sheet each month. The Fed’s portfolio swelled after three rounds of bond buying, a recession-era program designed to buoy the economy.

“This step reflects rising confidence that the recovery is sufficiently durable to withstand a slow withdrawal of emergency policy measures, a full ten years after the financial crisis struck,” said James McCann, senior global economist at Aberdeen Standard Investments.

Investors were more focused on the Fed’s outlook for inflation and the U.S. economy. Members of the Fed’s policy-setting committee are eyeing one more increase to the federal funds rate this year, likely at the December meeting. However, the pace of future rate hikes remains up for debate. The odds of a December rate hike have wavered amid lingering questions over inflation, which has come up short of the Fed’s 2% target despite a strengthening labor market. More Fed officials now believe it will take longer for inflation to surpass the 2% milestone, compared to the Fed’s last economic forecast provided in June.

During a press conference, Fed Chairwoman Janet Yellen emphasized that the central bank is not “locked in” to a policy path and will continue to adjust its plans as necessary, depending on economic conditions.

“With inflation so far coming in on the soft side, rising geopolitical tensions, a political agenda and tax cuts that have yet to deliver the expected fiscal stimulus, and now a leadership gap at the Fed on the heels of [Vice Chairman Stanley Fischer’s] resignation, I think we are highly likely to see a more dovish and cautious Fed,” Alexandra Coupe, associate director for institutional investment firm Paamco, said in advance of the Fed’s decision.

The Fed also noted that disruptions from Hurricanes Harvey and Irma are “unlikely to materially alter the course of the national economy over the medium term.”

The benchmark 10-year Treasury yield rose to 2.268% from 2.239%. Yields climb as prices fall.

Gold, another safe-haven investment, dropped as well. Prices slipped 0.5% to $1,303.90 a troy ounce.

U.S. oil prices jumped 93 cents, or 1.9%, to $50.41 a barrel. Brent crude, the international benchmark, was trading 1.9% higher at $56.20.

Energy stocks were a top performer on the day. The Energy Information Administration said more refineries have resumed operations after Hurricane Harvey forced many facilities along the Texas coast to shut down. Financials also climbed in response to stronger bond yields.

In corporate news, General Mills (NYSE:GIS) reported a weaker quarterly profit due to softer yogurt sales. Shares of the cereal and snack maker were down 5.8%.

FedEx (NYSE:FDX) rallied 2.1% in spite of an earnings miss. The shipping giant also cut its full-year outlook after a quarter that felt pressure from storm-related issues and a costly cyber-attack in Europe.