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Market Reaction to the Fed’s July Policy Statement

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Jul. 29 2016, Published 9:10 a.m. ET

Equities barely reacted

Equity markets barely reacted to the Fed’s July policy statement released on July 27, 2016. The S&P 500 index was weighed down by the consumer staples sector in general and Coca-Cola (KO) in particular. This means that even after the relatively hawkish tone of the Fed’s statement, the Markets chose to focus on other developments for cues. This also indicates that the Markets aren’t buying the rate hike argument, at least not until September.

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The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index (IVV), fell 0.1% at the close of trade on July 27, 2016. It rose at the same pace the next day. The SPDR Dow Jones Industrial Average ETF (DIA) was flat on July 27 and fell 0.1% the next day. Apple’s (AAPL) better-than-expected quarterly profit and telecom companies such as T-Mobile US (TMUS) helped retrieve most losses.

Treasury yields fell

Treasury yields fell nearly across the yield curve after the Fed’s July policy statement was released. The fall was in the range of 2–5 basis points. Bonds in the intermediate to long-term maturity bracket saw yields fall by a uniform 5 basis points on July 27. The next day, Treasury Bill yields fell, but yields on notes and bonds broadly held their ground from the previous day.

Among funds that invest in bonds, the iShares Barclays 20+ Year Treasury Bond (TLT), which invests in longer-maturity Treasuries, was the biggest gainer on July 27. It rose 1.2%. The next day, it fell by 0.2%.

The iShares Barclays TIPS Bond (TIP), which invests in inflation-protected bonds issued by the U.S. Treasury, rose 0.4% on July 27 on improved inflation expectations. It followed this up with a 0.1% rise the next day.

The iShares iBoxx $ Investment Grade Corporate Bond (LQD), which invests in high-grade corporate bonds, rose 0.4% on July 27. It fell by 0.1% the next day. The iShares Core US Aggregate Bond (AGG) rose 0.3% on July 27 and was nearly flat the next day.

We’ve looked at the Market reaction. Now let’s look more closely at the impact of the Brexit vote on US monetary policy.

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