Stocks Settle Lower After Fed Meeting
Wall Street's data-inspired rally faded into the close Wednesday, and
the major indices finished slightly lower after traders and analysts
found themselves struggling to discern the Federal Reserve's
intentions on the future direction of interest rates.
The Dow Jones Industrial Average, up nearly 180 points earlier,
squandered all of those gains to end down 11.81 points, or 0.09%, at
12,820.13. The S&P 500 shed 5.35 points, or 0.38%, at 1385.59, and the
Nasdaq Composite lost 13.3 points, or 0.55%, to 2412.80.
The story of the day was the Fed, which cut its fed funds target by 25
basis points, taking the overnight interbank lending rate to 2% and
extending a series of reductions that have lowered rates by 325 basis
points since September. The discount rate, or that at which the Fed
lends money to banks, was also lowered by a quarter-point, to 2.25%.
In its decision, the Federal Open Market Committee, the policymaking
arm of the Fed, cited financial markets that remain "under
considerable stress," a softening labor market, tight credit
conditions and the deepening housing contraction.
The downturn in the stock market came as the FOMC set off a debate
about whether it might pause the rate-easing cycle or continue to cut.
Notably, the Fed removed language from its statement about risks being
weighted to the downside.
"The substantial easing of monetary policy to date, combined with
ongoing measures to foster market liquidity, should help to promote
moderate growth over time and to mitigate risks to economic activity,"
the FOMC statement said.
While a number of observers felt the central bank was signaling that
it will keep rates on hold, not everyone was convinced.
Richard Yamarone, chief economist with Argus Research, said, "The
Fed's shut the door on rate cuts, but it's unlocked. It's only
unlocked in the event that there's some financial calamity which
forces them to reopen the door, but for all intents and purposes, I
think this rate-cutting campaign has ended."
Brian Bethune, chief financial economist with Global Insight, said:
"If the Fed is right, then wonderful. We're finally seeing the light
at the end of the tunnel. But if the Fed is premature in terms of the
decision to pause, then that could be problematic."
As a result, the market was having trouble digesting the Fed's stance,
he said. "I think there's a sense that [traders would] love to believe
this is the end. But then our gut is telling us that it's too good to
be true, and that the headwinds we're facing suggest that the Fed may
not have written the final chapter here."
Meanwhile, Marc Pado, U.S. market economist with Cantor Fitzgerald,
said the U.S. dollar weakened because he believed the Fed didn't
entirely set aside the possibility of further rate cuts.
"People were looking for resistance to come in at 13,000 [on the Dow]
anyway, so they started pounding it," he said. "They weren't pounding
it for any fundamental reason. The upside trade had been made, so they
just got on it."
Pado noted that there are eight weeks between this Fed meeting and the
next. "That's a lot of time for things to change, so I think the
statement can be seen as, they're comfortable with this through eight
weeks, and then they will re*****s."
The Fed also mentioned the relentless upward drive in commodities
prices lately and said that it will continue to monitor those
developments carefully, but is expecting inflation to moderate in
coming quarters.
Still, said Pado, "the Fed could have gotten away with something a lot
firmer, especially with oil up around $120. The key to the weakness in
that statement was that they still expect inflation pressure to
subside in the second half of the year."
Two members of the FOMC-- Richard Fisher of Dallas and Charles Plosser
of Philadelphia -- dissented from the decision, preferring no cut at
all. Both also disagreed with the last reduction, citing inflationary
worries.
Ryan Detrick, senior technical strategist with Schaeffer's Investment
Research, said, "in the short term, I think it really shows how much
volatility Fed days really do bring. It takes a couple of days for
things to play out."
Detrick also noted that the S&P appeared to be approaching resistance
at the 1400 level, and that investors may be looking for another
catalyst to bring it over the top. "The Fed has done a lot for the
market, but what people want to see are economic numbers turning
around, and we haven't quite seen that yet," he said.
As for equities, buyers had the edge earlier in the day after the
Commerce Department issued a preliminary gross domestic product re****t
that showed growth of 0.6% in the first quarter, a hair higher than
consensus and flat with last quarter. GDP numbers often undergo
revisions. If they remain substantively accurate, though, they would
indicate that the U.S. economy, at least for now, has avoided a
recession, contrary to what many economists and consumers previously
believed.
Roughly 4.5 billion shares changed hands on the New York Stock
Exchange, with advancers beating decliners by nearly a 5-to-4 margin.
Losers edged winners on the Nasdaq, as volume reached 2.19 billion
shares.
Treasury prices were little changed, having pulled back from more
substantial early gains. The 10-year note ticked up just 1/32 in price
to yield 3.82%, and the 30-year bond was flat in price, yielding
4.55%.
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