The U.S. Fed still believes inflation will be ‘transitory’

The benchmark S&P 500 index hit a record high for the fifth consecutive session on Wednesday after the U.S Federal Reserve said it’ll start tapering later this month.

A brief recap of what the Fed said

The central bank wants to end its $120 billion asset purchase programme by next June. Beginning in November, therefore, it’ll cut back on purchasing Treasury and mortgage-backed securities by $15 billion every month, with room to adjust the pace if need be.

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Bond purchases were a part of quantitative easing (QE) the U.S. Fed announced last year to support the U.S. economy amidst the global pandemic. The idea was to lower the long-term interest rates, keep the financial environment more lenient, and ultimately encourage higher demand.

But now that the U.S. economy is on track to grow at the fastest rate this year in roughly four decades, keeping such extreme measures in place could prove counterproductive since the challenge ahead is on the supply side, while the demand remains sustainably strong.

The U.S. Federal Reserve, however, left rates unchanged on Wednesday – an indication it continues to believe that inflation will be “transitory”.

Consumer discretionary and materials took the lead

The benchmark has now more than doubled since its low at the beginning of the pandemic in March 2020; a testimony to the success of the central bank’s monetary policy.

Within SPX, the two sectors that contributed the most in today’s gain were consumer discretionary and materials; up 1.8% and 1.1%, respectively. Energy, on the other hand, remained in the red with a 0.8% decline on Wednesday.

The other two major Wall Street indices – Nasdaq Composite and Dow Jones Industrial Averages – also closed at a record high today. At the time of writing, the U.S. 10-year Treasury yield stands at 1.603%.