Wall Street looked set for a lower open on Friday after an unexpected increase in the Federal Reserve's discount rate that signaled to some investors that the U.S. central bank may be starting to retreat from its easy money policy.
But the market got some comfort, with stock index futures paring losses, after a government data that showed consumer prices rose less than expected in January, soothing worries of inflation pressures.
Fed officials continued to calm speculation that the surprise rise in the rate it charges banks for emergency loans could bring forward broader policy tightening, saying borrowing costs in the economy would stay low.
New York Fed President William Dudley said the change to discount rate was a small technical change, adding the Fed's extended period pledge was still very much in place.
The move should be viewed as a pre-exit strategy move. The (actual) exit strategy is still several months in the future. Nonetheless, this will increase anxiety and uncertainty at the front-end of the curve, said a note by Jefferies Equity Daily, quoting its financial economist Ward McCarthy.
The rise in discount rates, despite being a signal the economy is on the right track, took markets by surprise and alarmed investors who have relied heavily on near-zero interest rates and have shoveled cheap money into risky but higher-yielding investments such as equities and commodities.
S&P 500 futures fell 3 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 28 points and Nasdaq 100 futures shed 1.8 points.
A government report showed U.S. consumer prices rose less than expected in January, while prices excluding food and energy fell for the first time since 1982.
It came in right around consensus. My take is if it's true that the Fed spooked the markets yesterday with their increase, this is certainly news that will have a calming effect, said Mike Schenk, senior economist for the Credit Union National Association In Madison, Wisconsin.
(Additional Reporting by Chuck Mikolajczak)
(Editing by Theodore d'Afflisio)