Dow closes with 650 point loss after Fed Chairman Powell says he wants to speed up cut

Wall Street plunged on Tuesday as the Dow Jones Industrial Average fell more than 600 points after Federal Reserve Chairman Jerome Powell said he was considering withdrawing support for the economy at an even faster pace . The blue chip index closed with a loss of over 650 points, ending November trading.

The Fed chief’s comments came amid already heightened investor concerns over the omicron variant of the coronavirus that sparked the biggest sell-off in the market this year, Black Friday.

The top three averages fell to session lows on Tuesday after Powell told the Senate Committee on Banking, Housing and Urban Affairs that in light of a “very strong” economy, “so it’s appropriate, in my opinion, to consider closing the taper of our asset purchases … maybe a few months earlier.

The Federal Open Market Committee, the central bank’s decision-making body, will then meet on December 14 and 15. After the group’s last meeting, Powell announced that the Fed would start cutting back on asset purchases in December. These purchases represent one of the largest central bank interventions undertaken in the wake of the pandemic.

Since June 2020, the central bank has purchased $ 120 billion in bonds – $ 80 billion in treasury bills and $ 40 billion in mortgage-backed securities – each month to add liquidity and keep the economy running efficiently. financial system. Powell said earlier this month that the Fed would reduce those purchases by about $ 15 billion per month, but noted the bank was “ready to adjust the pace of purchases if changes in the economic outlook warrant it.” . He echoed that sentiment on Tuesday, telling lawmakers: “you will see our policy continue to adapt.”

Powell’s comments indicate a shift in outlook for the Fed, which has insisted for months that inflationary pressures are “transient.” Powell acknowledged on Tuesday that it was time to “pull back” that word, and noted that the pressures on the supply side – the shipping and logistics grunts that have slowed global growth during the pandemic and are pushing up prices. prices of everything from cars to groceries – had been higher than expected.

A faster rate of reduction could lead to an earlier discussion among Fed policymakers about raising its benchmark interest rates, which the central bank cut to near zero in March of last year as the pandemic was hitting the US economy.

Some market participants said on Tuesday that Powell’s willingness to revisit the reduction schedule amid higher and more persistent inflation was a sign of smart policy.

“Over the long term, it’s constructive that the Fed is indicating that it is taking the threat of inflation seriously,” said Bill Merz, chief fixed income strategist at US Bank Wealth Management.

Others downplayed the idea that the markets were caught off guard by the prospect of stricter policy.

“The idea of ​​having to accelerate the cone was by no means something outside left field. It’s just happening at a time when we don’t know if this variant is going to drive the market down, ”said Liz Young, head of investment strategy at SoFi. She pointed out that many Wall Street watchers had already raised the possibility of a faster unwinding of the Fed’s bond program. “I don’t think everything he said was outrageous.”

But omicron, Young said, already had markets on edge. “We are on the third working day of knowing about this variant and we do not yet know how effective the vaccines and treatments are against it,” she said.

“The market doesn’t care so much about how quickly something spreads, it does care about hospitalizations and deaths,” Young said. “We don’t know enough yet. “

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