The Dow Jones Industrial Average (DJIA) traded cautiously on Wednesday, betraying the sense of paralysis festering in the U.S. stock market ahead of today’s crucial Federal Reserve meeting.
As of 10:07 am ET, the Dow had gained 55.4 points or 0.21% to recover to 26,434.68. The index fell more than 200 points in yesterday’s session.
The S&P 500 and Nasdaq fared somewhat better, rising 0.66% to 3,239.93 and 1.04% to 10,510.07, respectively.
The Federal Reserve will release its policy statement this afternoon at 2 pm ET. Chairman Jerome Powell will give a press conference 30 minutes later.
No one’s worried about an interest rate hike this time. Futures are pricing in a 100% probability that the Fed’s benchmark rate will remain at zero through at least March 2021.
Nor are any major policy moves expected today, though those could be coming down the pike at future FOMC meetings.
What Wall Street is looking for is forward guidance. Investors know the Fed isn’t hiding a crystal ball in the bowels of the Eccles building. After months of uncertainty, they want to know what economic conditions would engender interest rate adjustments and other policy responses.
There’s no guarantee that’s coming either.
What is virtually assured is that Jerome Powell will bend the knee to the market during his 2:30 pm ET press conference. Fed watchers expect plenty is going on behind the scenes. We won’t learn the details at this FOMC meeting, but we will hear Powell preview an ultra-accommodative stance.
As Rick Rieder, BlackRock chief investment officer of global fixed income, told CNBC:
I don’t think we’re going to learn a ton at this meeting, but I think behind the scenes, it will be pretty interesting around the work they’re doing and setting up for the September meeting.
I don’t think we’re going to learn specifically about any of that [specific policy actions]. I think the press conference will be interesting…
I think they are going to continue to err on the side of doing more rather than doing less. They are going to continue to emphasize the uncertainty.
The real fireworks will launch over the longer term.
Some analysts have floated the possibility of negative interest rates. Others believe the Fed’s bond-buying program is a prelude to the central bank investing directly in the stock market.
Before either of those unprecedented actions, there’s another policy the Fed will likely adopt: yield curve control.
The Fed already sets short-term interest rates. Under a regime of yield curve control , the Fed would establish long-term Treasury bond rates too. The bank would achieve this by acting as a backstop in the open market. If yields exceed their target rate, the Fed will increase its securities purchases to drive yields back toward the central bank peg.
With short-term interest rates already at zero, supporters of yield curve control say it’s the best way to provide the economy – and the Dow Jones – with ongoing stimulus.
Critics warn it could hamstring the Fed’s ability to raise interest rates in the future – and upend orderly financial markets in the present.
Bond market movements provide a crucial insight into risk sentiment. Yield curve inversions, for example, have long been associated with future economic turmoil.
The Wall Street Journal Editorial Board is already so sure that yield curve control is coming that it published an op-ed this week excoriating Powell for this “party trick.”
The op-ed reached an ominous conclusion:
We don’t know what price the global economy would pay for such a policy in economic distortions or financial instability. The Fed doesn’t know either. No one should be eager to find out.