Stocks fall over variant, Fed pulling support
The likelihood that the Federal Reserve will hasten the reduction of its support for the economy — just as a worrying new variant of the coronavirus has begun to spread — sent a shudder through Wall Street on Tuesday, driving down stocks as investors suddenly face growing uncertainty.
Jerome Powell, the Fed chair, told a Senate committee that inflation is likely to persist well into next year and that the Fed would consider tapering off its purchases of government bonds “perhaps a few months sooner” than previously expected.
The Fed’s bond-buying program has been a crucial factor in the swift rise of stocks since the start of the pandemic — the S&P 500 index has more than doubled since March 2020 — and the market’s response to Powell’s comments was immediate. Stocks, which had already opened lower amid growing concern about the omicron variant, tumbled further after Powell spoke and closed down 1.9 percent, pushing the benchmark index negative for the month.
“I think it’s a major moment,” said Nathan Koppikar, a portfolio manager at San Francisco hedge fund Orso Partners, which often places bets that certain stocks will fall. “The Fed is finally sort of putting their stake in the ground and saying that the bubble has gone on long enough.”
As the S&P 500 struck bottom in March 2020, the Fed was restarting the type of money-printing program it put in place in the aftermath of the financial crisis of 2008, known as quantitative easing. It allowed the central bank to pump trillions of dollars into the financial system by purchasing assets such as Treasury bonds with newly created dollars — a key source of momentum for the seemingly relentless rally in share prices.
That program was never going to last forever, however, and earlier this year the Fed began to discuss dialing back its bond purchases. After some jitters this fall, investors seemed to have come to grips with the Fed’s plans. But Powell’s statements about possibly responding to persistent inflation — which the central bank had long described as “transitory” — with more aggressive tapering amounts to a significant milestone.
“The retiring of ‘transitory’ means we’re also retiring quantitative easing, which has overstayed its welcome,” said Rick Rieder, head of the global allocation investment team at money management firm BlackRock in New York.
Without a regular influx of newly created dollars into capital markets, stocks could be in for a rockier run than they’ve seen in more than a year. “Volatility will be higher,” Rieder said.
An earlier end to the Fed’s bond-buying program would be a tacit signal of an increase in interest rates arriving sooner. Shortterm bond yields, which are heavily influenced by expectations for Fed rate hikes, spiked Tuesday. The yield on the two-year Treasury note rose to 0.56 percent from roughly 0.43 percent in relatively short order, as investors interpreted Powell’s statements as an acknowledgment that inflation would force the Fed toward favoring higher interest rates. Some of that surge melted away through the afternoon, as the yield on the two-year note ended the day at roughly 0.52 percent.
Stock prices were falling around the world before Powell’s testimony as investors struggled to understand the danger posed by the omicron variant, which began roiling markets last week. The Stoxx Europe 600 closed down 0.9 percent; in Asia, the Nikkei 225 in Japan and the Hang Seng in Hong Kong each dropped more than 1.5 percent.
Concerns about potential economic damage from the variant, such as restrictions on travel, hammered crude oil prices again Tuesday. Futures prices for benchmark American crude tumbled more than 4 percent and were down roughly 20 percent since the start of November.