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The Dow is set to extend the Fed rally with futures up 100 points


Commuters exit a Wall Street subway station near the New York Stock Exchange.

Michael Nagle | Bloomberg | Getty Images

Futures contracts tied to the major U.S. stock indexes rose in the the overnight session Wednesday evening after the Federal Reserve said hours prior that it does not currently expect to hike interest rates through 2023.

Fed Chair Jerome Powell reiterated that the central bank wants to see inflation consistently above its 2% target and material improvement in the U.S. labor market before considering changes to rates or its monthly bond purchases.

Dow futures rose more than 100 points and suggested a gain of a similar magnitude when regular trading resumes on Thursday. S&P 500 and Nasdaq 100 futures added 0.3% and 0.4%, respectively.

The key message from Wednesday’s Fed meeting “is that the committee expects to be extraordinarily accommodative for a very long time to come, even as the economic outlook brightens,” wrote Eric Winograd, senior economist at AB.

“The FOMC shares the market’s view that growth and inflation are likely to rebound as activity surges in 2021, but it does not view that surge in activity as durable,” he added.

The after-hour moves come after a late-day equity market pop during Powell’s remarks.

The upswing pushed the Dow Jones Industrial Average to its first close above 33,000 with a gain of 189 points. The S&P 500 also notched a record close and rose 0.3% to 3,974 after falling 0.7% earlier in Wednesday’s session.

The Nasdaq Composite, which had fallen as much as 1.5%, wiped out its early losses and ended the day 0.4% higher at 13,525.20. The tech-heavy benchmark was under pressure Wednesday morning as rising bond yields sapped growth stocks.

Announcements from the Fed and its leader dictated trading on Wednesday after the Fed upgraded its economic outlook to reflect expectations for a stronger recovery while simultaneously quelling investors’ concerns that it could abandon its easy monetary policy sooner than expected.

The Fed said it expects to see gross domestic product grow 6.5% in 2021 before cooling off in later years and inflation rise 2.2% this year as measured by personal consumption expenditures. The central bank’s stated goal is to keep inflation at 2% over the long run.

But Powell managed to convince traders that the Fed would need to see a material and sustained move upward in prices and a sharp drop in unemployment before debating changes to its current easy policy stance.

The Fed expects to continue easy monetary policy “for several quarters to come, to leave the policy rate at zero for the foreseeable future, and to keep the policy rate well below neutral for several years,” added AB’s Winograd. “That is an exceptionally long period of extraordinarily accommodative policy.”

The 10-year Treasury yield came off its high of the day following the central bank’s update. The rate was last seen at 1.646%. Earlier in the session, the benchmark rate jumped to 1.689%, hitting a level unseen since late January 2020.

Higher rates have been hurting growth-oriented companies particularly hard as they erode the value of future cash flows.

Tesla, for example, had fallen 3.8% on Wednesday prior to the Fed’s announcement, tracking the rise of long-term rates. The stock popped following the Fed’s release and ended the session up 3.6% as yields receded.

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