Markets rebound despite Fed decision
Wall Street overcame disappointment in the Federal Reserve’s failure to move toward an easing of interest rates Tuesday, and stocks made a late-day surge as the decision was seen as a sign the economy wasn’t threatened by turmoil in the credit markets.
Investors were at first deeply disappointed that policymakers, who kept benchmark rates on hold at 5.25 percent, did not provide any hints about a possible cut. But, after digesting the policy statement, they quickly gained solace the economy is likely to withstand troubles in the mortgage industry. The Dow Jones industrials rose into positive territory from a 121 point deficit right after the decision was announced.
The Fed’s Open Market Committee’s economic assessment said the central bank’s predominant concern “remains the risk that inflation will fail to moderate as expected.” Wall Street was relieved the Fed didn’t consider of bigger concern recent anxiety about how tightening credit standards will affect the economy, which has caused stocks to wobble in the past two weeks.
The statement — while noting credit problems, continuing weakness in the housing market and the market’s turbulence — stood fast by the Fed’s inflation policy. However, it gave little new insight into which way policymakers were leaning about a possible interest rate cut.
“I think what the Fed is trying to tell us is the economy is still in reasonably good shape, they’re still concerned about inflation and they welcome the repricing of risk as long as it does not result in the markets seizing up from a liquidly standpoint,” said Robert Auwaerter, head of fixed income portfolio management at Vanguard Group.
The Dow gained 35.52, or 0.26 percent, to 13,504.30. The blue chip index had risen as much as 102 points after the decision; it is the first time since July 30 that it hasn’t closed with a triple-digit gain or loss.
The Standard & Poor’s 500 index rose 9.04, or 0.62 percent, to 1,476.71, while the Nasdaq composite index rose 14.27, or 0.56 percent, to 2,561.60. The Russell 2000 index of smaller companies fell 7.22, or 0.94 percent, to 773.61.
In recent weeks, the major stock market indexes have traded erratically, with the Dow routinely showing triple-digit swings. The frenetic trading follows the stock market’s high seen July 19, when the Dow closed above 14,000 for the first time and the Standard & Poor’s 500 index also saw a record finish.
Treasury bonds fell as investors moved back into stocks, with the yield on the 10-year note falling to 4.77 percent from late Monday’s 4.74 percent. Investors had been moving into safer investments, like Treasuries, to avoid volatility in major market indexes.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude oil for September delivery rose 36 cents to settle at $72.42 a barrel on the New York Mercantile Exchange. A week ago, crude closed at a record $78.21 a barrel.
Advancing issues outpaced decliners by a 3 to 2 basis on the New York Stock Exchange, where volume came to 2.14 billion shares.
Overseas, European markets rose higher following Monday’s U.S. advance. London’s FTSE 100 closed up 1.93 percent, Germany’s DAX index rose 0.93 percent, while France’s CAC-40 rose 1.58 percent. Japan’s Nikkei stock average closed up 0.04 percent.