By Mark DeCambre, MarketWatch
All eyes on Yellen as the stock market awaits Fed's two-day
meeting
Wall Street investors have shrugged off recent worries to propel
stocks to fresh all-time highs, but this week's meeting of Federal
Reserve policy makers might provide investors the clearest sign yet
about the health of the U.S. economy and how the central bank is
construing stubbornly low inflation.
The Fed gathering set for Tuesday and Wednesday comes against
the backdrop of a host of recent events that market participants
are anticipating will factor in policy maker's decision making: The
economic impact of Hurricanes Irma
(http://www.marketwatch.com/story/harvey-irma-could-ding-us-economy-for-combined-290-billion-2017-09-10)
and Harvey,
(http://www.marketwatch.com/story/why-oil-prices-are-sinking-as-gasoline-soars-after-harvey-2017-08-28)
sluggish inflation, the outlook for fiscal stimulus out of
Washington, may be a just a few of the topics that are broached.
(That is not even to mention the incalculable risks out of the
Korean Peninsula).
Read: Why Harvey and Irma won't change the Fed's rate-raising
timeline
(http://www.marketwatch.com/story/why-harvey-and-irma-wont-change-the-feds-rate-raising-timeline-2017-09-13)
Although Janet Yellen's Fed isn't expected to make any change to
interest rates, it is anticipated that it will lay the groundwork
for unwinding its $4.5 trillion balance sheet, if not announce its
start. The coming asset-portfolio reduction has been an important
focus for markets because of the unprecedented nature of unraveling
a nearly decadeslong initiative of monetary stimulus, which could
further tighten borrowing costs for individuals and
corporations.
Yellen is likely to emphasize that normalizing the balance sheet
is going to be gradual so as to avoid disrupting markets, said Paul
Ashworth, chief North American economist for Capital Economics.
The plan is to shrink by only $10 billion a month, with the pace
increasing by $10 billion every quarter, up to a maximum of $50
billion a month.
Bond and currency markets, which have been the most attuned to
Fed policy, will experience the greatest degree of volatility if
there are any Fed surprises.
The yield, which moves inversely to prices, on the 10-year
Treasury note has climbed to around 2.24% as of Tuesday's trade,
compared with 2.05% on Sept. 11. The U.S. dollar has also reclaimed
some lost ground. However, both the dollar and yields remain near
historic lows despite being in the midst of a rate-hike cycle that
should theoretically buoy the pair. Higher rates make the buck more
attractive to traders, while pushing up yields on bonds as
investors await fresh issuance bearing richer coupons.
Some market participants attribute a combination of fluctuating
risks centered on North Korea's military aggressions, and fading
expectations this year for the pro-growth policies promised by
President Donald Trump during his presidential campaign. Political
doubts have been underpinned by increased partisan tension, though
a glimmer of bipartisanship has offered some promise of
successfully pursuing tax reform, deregulation, and increased
infrastructure spending in the coming months.
Some of that hope has filtered into stock markets, with the Dow
and the S&P 500 finishing at records on Monday
(http://www.marketwatch.com/story/dow-sp-500-line-up-for-fresh-records-to-start-the-week-2017-09-18),
with the Nasdaq not too far behind. The Dow Jones Industrial
Average on Tuesday closed up 39 points, to 0.2%, at 22,370, marking
its sixth straight record close and its eighth consecutive day of
gains.
Last week
(http://www.marketwatch.com/story/dow-futures-steady-paring-losses-that-came-after-latest-north-korean-missile-2017-09-15),
the blue-chip gauge booked a gain of 2.2%, marking its best weekly
advance since the week ended Dec. 9, according to FactSet data.
The S&P 500 finished Tuesday up about 3 points higher, a
return of 0.1%, at 2,506, while the Nasdaq Composite Index rose
about 7 points, or 0.1%, at 6,461. Both marked all-time closing
highs.
Meanwhile, the U.S. officially hit $20 trillion in debt
(http://www.marketwatch.com/story/heres-how-the-us-got-to-20-trillion-in-debt-2017-03-30),
with about half of that added over the past decade or so.
The 2007-09 recession, brought on by the collapse of the U.S.
housing bubble, is at least partly to blame, with the government
responding with huge bank bailouts and the stimulus programs. In
fiscal years 2009-2012, deficits exceeded $1 trillion.
James Rickards, attorney and finance commentator, in the Daily
Reckoning blog
(https://dailyreckoning.com/golden-solution-americas-debt-crisis/)
said the current level of inflation, running below the Fed's 2%
annual target, is partially tied to the increase in the
deficit.
"Now, the Fed printed about $4 trillion over the past several
years and we barely have any inflation at all. But most of the new
money was given by the Fed to the banks, who turned around and
parked it on deposit at the Fed to gain interest. The money never
made it out into the economy, where it would produce inflation. The
bottom line is that not even money printing has worked to get
inflation moving," Rickards wrote.
On Wednesday, the market will see what the Fed has to say about
the state of inflation in the world.
Beyond the Fed, the Bank of Japan is slated to deliver its
updated policy statement on Thursday.
(END) Dow Jones Newswires
September 19, 2017 16:08 ET (20:08 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.