The Federal Reserve shocked — and delighted — financial markets Wednesday afternoon by deciding to hold back on trimming its $85 billion-a-month bond-buying program.
The decision to continue its bond-buying set off a sharp rally in stocks. The Standard & Poor’s 500 Index ($INX +1.22%) and the Dow Jones industrials ($INDU +0.95%) reached new intraday highs and set new closing highs. The Nasdaq Composite Index ($COMPX +1.01%) closed at a 13-year high. Interest rates fell.
The decision was announced after a two-day meeting of the Federal Open Market Committee, the central bank’s policy-making body. Fed Chairman Ben Bernanke, pictured, was holding a news conference to discuss the decision.
The Fed explicitly said it wanted more evidence that the economic recovery has enough strength to weather cutting back the bond buying, often called quantitative easing. The Fed is currently buying $45 billion a month in Treasury securities and $40 billion a month in mortgage bonds. The program was started in a bid to boost the economy, especially the housing market.
The Dow closed up 147 points to 15,677 after setting a new intraday high of 15,709.58. The S&P 500 gained 21 points to 1,726. It an intraday high of 1,729.44. The Nasdaq had added 38 points to 3,784, its best finish since Sept. 22, 2000, when the index closed at 3,803.76.
The big rally also pushed futures prices higher for gold (-GC), silver (-SI), platinum (-PL), copper (-HG) and crude oil (-CL). Retail gasoline continued to drift lower, however, averaging $3.506 a gallon, according to AAA’s Daily Fuel Gauge Report.
The 10-year Treasury yield fell to 2.71% Wednesday from 2.853% on Tuesday. The yield had briefly touched 2.9%. The yield is important because it has a heavy influence on mortgage rates. As yields fell, financial, homebuilding and automotive stocks moved higher.
Talk that the Fed might scale back its bond buying pushed interest rates higher starting in May. The 10-year Treasury yield moved up from as low as 1.61% in early May to nearly 3% on Sept 5.
The recent rise in interest rates — what the Fed statement called “the tightening of financial conditions observed in recent months” — prompted the decision. The rate increases, “if sustained, could slow the pace of improvement in the economy and labor market,” the statement said.
At the same time, The Wall Street Journal noted, Fed officials see weaker growth and slower inflation than they did before. Indeed, the Fed’s central tendency projections were trimmed. Governors and presidents of the 12 Federal Reserve banks see the economy showing 2% to 2.3% annual growth in the fourth quarter. That’s down from a June projection of 2.3% to 2.6%.
In 2014, the group sees overall growth at 2.9% to 3.1%. They had projected 3% to 3.5% in June.
Wednesday’s decision means interest rates on everything from home mortgages and car loans to corporate expansion should remain at low levels. Bankrate.com said the rate on a 30-year home mortgage was 4.5% on Wednesday, down from 4.6% a week ago. Rates have hovered around 4.5% since June.
But the decision is also mindful that the recovery has been weak by historic standards. Unemployment is falling grudgingly, and the labor participation rate — people involved in job markets compared with the overall population — is at 63.2%, the lowest level since the summer of 1978. (It peaked at 67.3% in the winter and spring of 2000.)
Tapering will come. IHS Global Insight economist Paul Edelstein thinks the Fed will announce tapering in December.
But the Fed expects it won’t consider raising rates unless the unemployment rate drops under 6.5% and inflation exceeds its 2%-a-year inflation target by a half percentage point. The target for its federal funds rate — the target for banks making overnight loans to each other — remains at 0% to 0.25%. Bernanke said at his new conference that rate probably won’t rise much over the next 18 months. Fed officials see the federal funds rate rising only to 1% at the end of 2015.
What the Fed didn’t say in its statement was its worries about the looming fights over the federal budget and the efforts to raise the nation’s debt ceiling.
When the question was raised at the news conference, Bernanke said that a government shutdown and, especially, a failure to raise the debt ceiling could have “very serious consequences” for financial markets and the economy.
With today’s performance, the Dow is up 19.6% for the year. The S&P 500 has gained 21%. The Nasdaq is up 25.3%. For September so far, the Dow has risen 5.9%, with the S&P 500 up 5.7% and the Nasdaq up 5.4%.
This was a broad rally: 29 of the 30 Dow stocks were higher, led by Alcoa (AA +3.57%), up 30 cents to $8.56. The laggard was UnitedHealth Group (UNH), down $1.27 to $73.04. That’s investors worried that Republicans will succeed at de-funding the Affordable Healthcare Act — also known as Obamacare. UnitedHealth was expected to gain many new subscribers under the health-care law.
A total of 436 S&P 500 stocks were higher, led by Adobe Systems (ADBE +9.22%), gold-producer Newmont Mining (NEM +8.24%) and homebuilders D.R. Horton (DHI +6.92%) and Lennar (LEN +6.54%).
FedEx (FDX +5.03%) was up $5.57 to $116.25 after fiscal-first-quarter results beat estimates. What’s helping: cost-cuts and promotion of cheaper shipping options.
Meanwhile, 84 stocks in the Nasdaq-100 Index ($NDX +1.27%) were higher, led by Adobe and Randgold Resources (GOLD +7.60%).
Thursday could see some pressures on stocks. Oracle (ORCL +1.83%) shares were off 3% after hours to $32.80 after revenue for its fiscal-first quarter revenue missed estimates. And it trimmed its guidance for the second quarter to 65 cents to 70 cents a share; the Street had been looking for 70 cents.