No change to U.S. interest rates is expected, but investors will assess comments for guidance on future moves
U.S. stocks slipped and Treasury yields rose Wednesday ahead of the Federal Reserve’s monetary policy decision.
The Fed concludes its two-day monetary policy meeting Wednesday. While no change to interest rates is expected, investors will assess the bank’s policy statement and economic projections as well as Chairwoman Janet Yellen’s news conference for guidance on what Fed officials will do next.
“A lot is at stake for the markets today,” said Lars Tranberg, senior analyst at Danske Capital.
A gauge of inflation released Wednesday could bolster the case for the central bank to raise rates later this year. Consumer prices, stripping out energy and food costs, rose 2.3% in February from a year ago, the strongest 12-month increase since May 2012. Overall prices fell 0.2%.
Central bank officials consider inflation and the health of the labor market as they debate when to next raise short-term rates.
The Dow Jones Industrial Average slipped 0.1% to 17229. The S&P 500 lost 0.1%, and the Nasdaq Composite fell 0.1%.
Treasury yields rose, pushing prices lower. The yield on the 10-year Treasury note rose to 1.992% from 1.961% on Tuesday. The policy-sensitive two-year yield rose to 0.989% from 0.968% a day ago.
At their December meeting, Fed officials implied there would be four rate increases this year, something that few market participants currently expect. A recent Wall Street Journal survey found economists expect just two increases this year.
“The risk to the market is the Fed coming out and saying, ‘We think the case is maybe not four but three’” rate increases, said Mark Luschini, chief investment strategist at Janney Montgomery Scott. That scenario could surprise investors and trigger a short-term pullback in U.S. stocks, especially as “investors’ nerves have obviously been a little frayed already, as evidenced by the volatility in the market,” he added.
The Stoxx Europe 600 slipped 0.1%. Shares of Credit Suisse Group fell 4.3%, while shares in Deutsche Bank declined nearly 5%.
Keeping losses in check, auto makers gained after data showed new car sales in the European Union rose in February, while shares of energy companies also climbed. U.S. crude oil rose 2.9% to $37.39 a barrel. Earlier, reports said that major producers will meet to discuss output limits next month.
Still, for markets at the moment, “as much as I’d like to say monetary policy is no longer in the driver’s seat, it seems like it still is,” said Jeff Moser, portfolio manager at the Wells Fargo Large Cap Core Fund. Markets want assurances on the health of the economy, he added.
Recent U.S. economic data, including a strong jobs report, have helped boost expectations among investors that the Fed will raise interest rates later in the year.
A month ago, markets were pricing in almost no rate increases this year. That has changed.
“The fear really has dissipated around economic growth prospects,” said Tom Manning, chief executive at F.L. Putnam Investment Management. The Fed will likely pave the way to raise rates in June but leave the option open to raise rates in April, he said.
Housing starts rose 5.2% in February from a month earlier, due to a surge in construction of single-family homes. Housing was a pillar of the U.S. economy last year.
“Janet Yellen is going to tread very carefully to communicate something the market will like—if she’s too negative, recession worries could pick up, and if she’s too hawkish, the dollar could strengthen and hurt emerging markets,” Mr. Tranberg said.
The euro fell 0.3% against the dollar to $1.1071. The dollar rose 0.5% against the yen to ¥113.69 after Bank of Japan Gov. Haruhiko Kuroda said the bank is prepared to launch additional easing measures.
In corporate news, London Stock Exchange Group and Deutsche Börse agreed to an all-share merger, creating Europe’s biggest securities-markets operator worth more than $30 billion.
Earlier, shares in China edged up after Premier Li Keqiang said it is “impossible” for China not to realize its economic targets. Japan’s Nikkei Stock Average fell 0.8%, while Australia’s S&P ASX 200 edged higher.
