Wall Street Close: Benchmarks mostly higher on Fed's policy shift

• The Dow Jones Industrial Average added 160.35 points, or 0.57%, to 28,492.27.
• The S&P 500 put on 5.82 points, or 0.17%, to 3,484.55.
• The Nasdaq Composite fell 39.72 points, or 0.34%, to 11,625.34.

US benchmarks enjoyed a well-telegraphed lower for longer theme from the Federal Reserve today which helped to support the financial sectors.

The Fed’s decision to adopt an average inflation strategy have confirmed the expectation of persistently low interest rates and extensive QE.

Assuming no upside inflation shocks spoil the favourable environment that has been supporting risk appetite on Wall Street, the confidence in the Fed’s new inflation framework is probably here to stay.

Consequently, the S&P 500 and the Dow advanced.

The Dow Jones Industrial Average added 160.35 points, or 0.57%, to 28,492.27, the S&P 500 put on 5.82 points, or 0.17%, to 3,484.55 although the Nasdaq Composite fell 39.72 points, or 0.34%, to 11,625.34  

The financial sector buoyed both the S&P 500 and the Dow, pushing the former to its fifth straight record closing high. The Dow, on the other hand, remains more than 3.6% below its record high reached in February.

On the political front, there was a wobble on Wall Street later into the day on the back of House of Representatives Speaker Nancy Pelosi's statement saying Democrats and Republicans remain far apart over the next stimulus bill.

Jackson Hole outcome

The Fed moved to an average 2% inflation target, stating that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”

Analysts at ANZ bank noted that the long-run inflation expectations, as captured by TIPS breakevens, lifted slightly on the news, continuing the trend of the last two months.

That’s exactly what the Fed is trying to achieve, of course, and in such a weak economic environment getting inflation sustainably up to target won’t be easy. But it’s an important thought experiment – what will happen, in this world of enormous debt, when inflation expectations eventually, one day, for some reason, get high enough to push up yield curves meaningfully – either because central banks are expected to respond to it, or because they’re not?

SP 500 levels