Markets Mixed as Key Rate Stays at 1%
Wall Street struggled to a mixed finish Tuesday as the Federal Reserve held its key interest rate steady and appeared to sound less upbeat about the pace of the economy’s growth.
The Fed’s statement after its meeting was more tonic for the government bond market, where yields fell anew. The prospect of lower interest rates also boosted optimism about the housing market, analysts said.
As expected, central bank policymakers said they voted to keep their benchmark short-term interest rate at a four-decade low of 1% -- the level they have maintained since June -- and repeated that they could “be patient” with rates in part because inflation remains low.
But some wording changes in the statement suggested that Chairman Alan Greenspan and peers were “developing a bit of anxiety about the health of the economy,” said Paul Kasriel, economist at Northern Trust Co. in Chicago.
The Fed said “new hiring has lagged,” a more downbeat assessment than on Jan. 28, when it said that “although new hiring remains subdued, other indicators suggest an improvement in the labor market.”
Also, the latest statement said economic output was expanding at a “solid pace,” a change from January’s reference to output “expanding briskly.”
To some Wall Street pros who analyze every nuance of Fed-speak, the altered wording was a sign that the central bank might feel it was necessary to hold rates at current levels until 2005.
The Fed’s key rate “is not likely to rise in 2004,” said Sung Won Sohn, economist at Wells Fargo & Co. in Minneapolis.
Just two months ago the widespread assumption was that the Fed would begin to tighten credit by midyear.
But economic data have been mixed in recent weeks. Most important, the continuing trend of paltry growth in new jobs nationwide would make it politically difficult for the Fed to justify higher rates, analysts say.
The stock market, battered in recent days by economic concerns, profit taking and the Madrid terrorist bombings, initially rallied modestly after the Fed’s statement was released at 11:15 Pacific time. Prices quickly pulled back, then rebounded in the final hour of trading.
The Dow Jones industrial average, which hit a three-month low Monday, closed up 81.78 points, or 0.8%, at 10,184.67.
The Standard & Poor’s 500 index climbed 6.21 points, or 0.6%, to 1,110.70.
Rising stocks outnumbered losers by 7 to 5 on the New York Stock Exchange. But on Nasdaq losers had a narrow edge, and the Nasdaq composite index closed only slightly positive, up 3.89 points, or 0.2%, to 1,943.09.
It was a different story in the Treasury market. Expectations that the Fed could be on hold through 2004 are emboldening professional investors to snap up bonds, analysts said. Big investors can profit by borrowing near the Fed’s short-term rate of 1% to buy longer-term bonds that pay rates well above 1%.
The yield on the 10-year Treasury note dipped to an eight-month low of 3.68% from 3.76% on Monday, continuing the slide that began two weeks ago after the government’s report on February employment trends.
Many analysts warn that bond yields could quickly soar if the economy begins to show substantial job growth.
Taking a long-term view of the economy, and assuming it continues to expand, “I think bonds probably are mispriced” at current yields, said Christopher Wolfe, a managing director at J.P. Morgan Private Bank in New York.
In the near term, falling bond yields could help the housing market because mortgage rates track bonds. The average rate on 30-year mortgages nationwide was 5.41% last week, according to lending giant Freddie Mac. That was down from 6.02% in early December and near the generational low of 5.21% reached in mid-June.
The Mortgage Bankers Assn. on Monday raised its forecast for loan originations in 2004 to $2.5 trillion from a previous forecast of $2 trillion. The group said falling interest rates should fuel more home purchases and spark another wave of refinancings.
“I think you’re going to see a resurgence in refinancings” in coming months, said Doug Duncan, economist at the mortgage group. Many homeowners, he said, are just beginning to notice that rates are low enough to provide a meaningful savings over their current monthly payments.
Federal Reserve policy over the last year has implicitly relied on rising stock prices and rising housing prices to underpin the economy, said Northern Trust’s Kasriel.
That isn’t changing, he said. By keeping its key rate at 1%, the central bank is “encouraging the public to borrow to buy stocks and houses,” he said.
But it isn’t clear that the stock market can rebound soon, some analysts say. Worries about the economy and the revived concerns about terrorism could keep investors sidelined, some say.
Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, said he expected the S&P; 500 index to be stuck in a range of 1,100 to 1,150 in the near term. “I think we’ve seen the highs for the year” in the market overall, he said.
*
Among Tuesday’s highlights:
* Some travel-related stocks continued to weaken on terrorism fears. Delta Air Lines slid 7 cents to $7.69. Royal Caribbean Cruises dropped $1.37 to $39.09.
* In the Dow, 3M surged $3.94 to $78.81. Late Monday the conglomerate raised its earnings forecast for the year.
* Metro-Goldwyn-Mayer jumped $1.95, or 12%, to $18.15 a day after the studio said that it was considering paying out as much as $2.1 billion to shareholders in a one-time dividend.
* Community First Bankshares rallied $4.11 to $32.11. French bank BNP Paribas said its U.S. arm, BancWest, would buy Community First for $1.2 billion, pushing deeper into U.S. retail banking. BancWest, which operates Bank of the West in California, would pay $32.25 cash for each Community First share.
