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Fed holds but Dow sinks on statement tone

The result of the FOMC meeting surprised no-one, but US stocks have slid rapidly as investors perceived hawkish signs in the official statement.

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As was widely expected, the Fed decided to maintain the pace of its monetary stimulus at its latest policy meeting, saying that the FOMC sees improvements in the economy, but ‘awaits more evidence that progress will be sustained before adjusting the pace of its purchases.’

The statement described growth since September as being ‘moderate’, the exact same terminology used in the previous statement, from a meeting that we are told was very close in terms of deciding whether or not to taper.

This is slightly surprising, given the softness we have seen in certain areas, although the Fed did acknowledge that ‘the unemployment rate remains elevated’ and that ‘fiscal policy is restraining economic growth.’

Certain market participants have evidently interpreted aspects of the language used as being more hawkish than previously thought, given the sharp sell-off seen not long after the statement’s release. With under an hour to the close in New York, the Dow was trading down 0.37% or 58 points at 15,621, having dropped more than 100 points in the wake of the Fed announcement. The S&P 500 was down 0.52% at 1762.8.

The Fed dropped a line that was included in the September statement that said ‘the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market’ and it is probably this facet that has shaken the market.

I would be dubious about this portending any imminent tapering though: the fundamental guiding principle remains intact, namely that the Fed will continue to monitor ‘incoming information’ and, crucially, the pace of asset purchases ‘will remain contingent on the Committee's economic outlook’.

The market sometimes gets carried away thinking that the Fed are working to a calendar, which is why you start hearing forecasts of no taper until next April, but the Fed has stressed again and again that stimulus is ‘not on a preset course.’ To put that another way, the Fed is not signalling that it will be tapering next month, or the month after, or next year: they do not know because it is uncertain. We are waiting on data that has not been determined yet.

We can make educated guesses about certain outcomes. I would presume that the shutdown has hindered the economy. We are yet to see this reflected fully in economic indicators. I would guess that the Fed would want to see at least two months in a row of improvement after this dent to make sure there is no lasting impact. That probably sees us to the end of the year, but I am discussing uncertainty here: remember, things hinge on the incoming data.

We have some big names reporting after the bell, including Dow-component Visa, Expedia, Starbucks and social-media giant Facebook.

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