DOW, S&P FINISH AT RECORD LEVELS, DOLLAR JUMPS TO 2-WEEK HIGH AS FED ANNOUNCE OCT START TO UNWINDING QE, SIGNAL DEC RATE HIKE ON THE TABLE

U.S. stock benchmarks ended a volatile session mostly in the green, with the Dow industrials and the S&P 500 carving out fresh all-time highs, as the Federal Reserve announced that, for the first time in nine years, it would start reducing the size of its $4.5 trillion asset portfolio commencing in October.

The U.S. central bank kept interest rates unchanged, as widely expected, but said it would start to shrink its balance sheet by $10 billion a month. The Fed also signaled a December rate increase remains on the table as the central bank embarks on an unprecedented unwind of crisis-era asset purchases that had helped to buoy markets over the past decade.

During a news conference to detail its policy plans, Yellen said the unwind would be conducted “gradually and predictably.”

“Even though this is a slow and deliberate and thoughtful unwind plan, it is not without its potential to rattle markets,” said Kristina Hooper, global market strategist at Invesco.

The Dow Jones Industrial Average DJIA, +0.19% rose 41.79 points, or 0.2%, at 22,412.59, supported by sharp gains in shares of McDonald’s Corp. MCD, +1.56%and Pfizer Inc. PFE, +1.52% Apple IncAAPL, -1.68% shares led Dow laggards, down 1.7%, on negative news.

The S&P 500 index SPX, +0.06% meanwhile, finished up 1.59 point, or less than 0.1%, at 2,508.24, after briefly touching its own fresh intraday day record at 2,508.85. Financials and industrials led the day’s advances, while a 1% tumble in the consumer-staples sector, underpinned by a drop in shares of General Mills IncGIS, -5.80% pressured the broad-market gauge.

The Nasdaq Composite Index COMP, -0.08% ended down 5.28 points, or less than 0.1%, at 6,456.04.

The Fed committed to reducing the bonds they own at a pace of $10 billion a month and increasing that pace by $10 billion every three months to a maximum pace of $50 billion a month, or $600 billion a year.

Meanwhile, 10-year Treasury note yield TMUBMUSD10Y, +1.02%  jumped to 2.27%, compared with 2.23% earlier in the session, with expectations for higher rates and additional monetary tightening. That encouraged selling in government bonds, pushing yields, which move in the opposite direction to prices, higher. The dollar, which draws bidders in a higher interest-rate regime, enjoyed a fillip, up 0.7% at 92.475, based on the ICE U.S. Dollar Index DXY, +0.66% which measures the buck against a half-dozen currencies.

Read: Why stock market investors shouldn’t sweat a shrinking Fed balance sheet

The Fed kept its targeted federal-funds rate between 1% to 1.25%, and said the devastation caused by Hurricanes Harvey and Irma isn’t likely to materially alter the course of the economy over the medium term, underscoring the central bank’s determination to normalize interest-rate policy.

The Fed’s interest-rate projections, known as the so-called dot plot, implies a rate hike in December and three more in 2018.

Some industry participants have been describing the asset reduction as the “great unwind” and worrying that it might roil markets. “It is the start of something unknown, it is going to start jitters. It is going to make us tremble,” said John Manley, chief equity strategist at Wells Fargo Funds Management.

However, the Fed is aiming to offer as little disruption as possible, he noted.

“I’ll admit that it feels a little surreal that this Federal Reserve with its addiction to manipulating markets is actually trying to kick the habit. The unwinding of the balance sheet will dominate markets for at least the next two years and cements our outlook for higher rates,” said Bryce Doty, senior portfolio manager at SIT Investments, which manages some $7 billion.

Yellen emphasized, during the news conference, that the central bank was monitoring stubbornly low inflation closely, with an eye to seeing it return to its 2% annual target. Inflation has been kept in check, despite an otherwise healthy labor market, which should theoretically lift prices and inflation. The Fed chief said policy makers are aware of the risk of prices suddenly jolting higher: “We want to be careful not to allow the economy to overheat to somewhere later on to have to have tighten monetary policy rapidly and…cause a recession.”

Several central-bank officials already wanted to start winding down the Fed’s portfolio of government securities in July, but the majority wanted to hold until a later date.

In other economic news on Wednesday, a reading on existing-home sales for August showed that sales dropped for the fourth time in five months as real-estate agents continue to blame a lack of available homes to buy. The National Association of Realtors said existing home sales fell 1.7% to a seasonally adjusted rate of 5.35 million.

 

Other markets: Stocks in Europe were ended flat, with the U.K.’s FTSE 100 index UKX, -0.05% particularly underperforming due to a rise in the pound. SterlingGBPUSD, +0.0296%  strengthened after U.K. retail sales for August showed a bigger rise than expected.

Asian stocks closed mixed as traders there remained cautious ahead of the Fed’s call.

Crude-oil prices CLV7, +1.64%  rose to a four-month high to settle at $50.41 a barrel, while gold futures ended higher at $1,316.40 an ounce, but pulled back somewhat in electronic trade after the Fed decision.