Stocks Climb on Fed Decision to Leave Rates Unchanged
Federal Reserve policymakers, confronted with rip-snorting economic growth in the United States but continued risk of spillover from fragile financial conditions overseas, voted Wednesday to leave short-term interest rates unchanged for now.
The decision, while expected, helped boost the stock market in late trading Wednesday, with the Dow Jones industrial average closing up 92.69 points, or 1%, at 9,366.81.
Meanwhile, in a separate announcement, the government said the soaring federal budget surplus will mean a reduction in the amount of new notes and bonds the Treasury sells near term.
At the Fed, the interest-rate-setting Open Market Committee adjourned a two-day policy meeting in Washington with no announcement.
That left the central bank’s federal funds rate--its target for the overnight loan rate among banks--unchanged at 4.75%, a four-year low. The so-called discount rate, which is the rate banks pay to borrow from the Fed, was unchanged at 4.5%.
The Fed cut the federal funds rate three times between late September and mid-November, from 5.5%, in the wake of severe turmoil in global markets following Russia’s economic crash in August.
Most analysts believe the Fed would never have reduced rates except for fear that world markets were headed for meltdown. The central bank’s usual sole determinant of interest rate policy--the condition of the U.S. economy--remained healthy throughout the global crisis.
Indeed, the government estimates the economy grew at a robust 5.6% annual rate in the fourth quarter, strongest in 2 1/2 years.
Fed Chairman Alan Greenspan told Congress last month that the U.S. economy “has continued to grow more rapidly than can be accommodated on an ongoing basis,” a veiled warning that the central bank may be forced to slow growth, and potential inflation pressures, by raising interest rates sooner rather than later.
But with Brazil’s currency devaluation of mid-January triggering fresh turmoil in global markets, the Fed most likely believes that raising rates at this point would be destabilizing for the global economy, analysts say.
Still, “the U.S. economy is performing marvelously well,” said Steve Wood, economist at NationsBanc Montgomery Securities in San Francisco. “Probably too well. If it doesn’t slow down on its own, the Fed is going to make it happen” by raising rates later.
The stock market appeared relieved on Wednesday, even though the Fed had been expected to stand pat: The Dow was up about 70 points before the Fed meeting ended, then climbed 22 points more.
In the broad market winners topped losers by 16 to 14 on the New York Stock Exchange and by 22 to 18 on Nasdaq.
The Nasdaq composite index rebounded after Tuesday’s losses, gaining 1.2%. Smaller stocks also inched higher: The Standard & Poor’s small-cap index added 0.4%.
Brokerage and bank stocks were strong, led by online brokers’ shares. Also, Morgan Stanley Dean Witter jumped $2.38 to $91.75 on rumors that Chase Manhattan may be interested in buying the firm. Chase gained $2.56 to $79.38.
Technology stocks rallied, led by Internet names. Yahoo jumped $35.13 to $358.06 and Amazon.com rose $15.50 to $125.75.
Defense stocks also gained, spurred by President Clinton’s proposal this week to raise defense spending. General Dynamics jumped $3 to $61.13. Boeing surged $2.63 to $36.81 after a Morgan Stanley analyst raised the stock to “outperform” from “neutral.”
In the bond market, meanwhile, long-term yields finished modestly higher, despite the Fed’s neutral stance and despite the Treasury’s announcement that it will offer fewer new bonds for sale next week at its quarterly “refunding.”
Flush with surplus, the Treasury will auction a total of $35 billion in five-year, 10-year and 30-year securities next week, below the $38 billion that analysts had expected.
Even though the government is in surplus, the Treasury still must sell new debt to roll over maturing debt issued years earlier.
Still, the Treasury estimates it will retire a net $5 billion of debt during the current quarter and pay down a record $105 billion to $110 billion in the second quarter.
Treasury officials said Wednesday that they’re considering reducing the amount of two-year notes and 30-year bonds to be sold later this year.
That may have helped bond yields pull back a bit from their highs early Wednesday. Still, they closed higher than on Tuesday, with the bellwether 30-year T-bond yield ending at 5.26%, up from 5.24% on Tuesday.
Market Roundup, C7
