Fed Language Soothes Markets
The stock market closed modestly higher Tuesday and Treasury bond yields dipped a bit after the Federal Reserve raised interest rates again and indicated there was more to come -- but maybe not too much more.
The Dow Jones industrial average ended with a gain of 55.95 points, or 0.5%, to 10,823.72, after rising as much as 104 points shortly after the Fed’s midday announcement.
In the bond market, the benchmark 10-year Treasury note yield slipped to 4.52% from 4.55% on Monday.
In commodity markets, gold prices fell sharply while natural gas jumped to a record on weather concerns.
The Fed lifted its key short-term rate from 4% to 4.25%. But the central bank’s post-meeting statement used different language than the statements issued after the previous 12 meetings. And the changes offered “a little something for everyone,” said Joseph LaVorgna, an economist at Deutsche Bank Securities in New York.
The Fed stopped referring to its policy stance as one of “accommodation,” encouraging stock market bulls who took the omission as a signal that the central bank was nearing the end of its credit-tightening campaign.
But policymakers also said they expected “some further measured policy firming,” which may have assured inflation-fearful bond investors that the Fed would continue to try to slow the economy enough to damp inflation worries.
Many Wall Street pros already had figured the Fed would stop raising its key rate when it reached about 4.75% in 2006, and the statement language seemed to be in line with that view -- which is why markets were relatively calm, analysts said.
“This was more or less what was expected,” said William Prophet, an interest rate strategist at brokerage UBS in Stamford, Conn.
Winners topped losers by 5 to 4 on the New York Stock Exchange in active trading.
The stock market had rallied sharply in November, in part on hopes the Fed was nearly done raising rates. Although the market has struggled this month, the blue-chip Standard & Poor’s 500 index is nearly back to the 4 1/2 -year closing high of 1,268.25 reached Nov. 25. The index gained 7 points, or 0.6%, to 1,267.43 on Tuesday.
The technology-dominated Nasdaq composite index, which hit a 4 1/2 -year high of 2,273.37 on Dec. 2, added 4.05 points, or 0.2%, to 2,265.00 on Tuesday.
Many stocks have fared much better this year than either the S&P; 500 or Nasdaq index might imply. The NYSE composite index, for example, set another in a series of record highs Tuesday, rising 0.4% to 7,825.00. The index is up 7.9% year to date, compared with a 4.6% gain for the S&P; 500.
Wall Street bulls believe that the stock market’s fourth-quarter strength is telegraphing solid economic growth in 2006, which could keep corporate earnings rising.
But if the economy remains reasonably strong -- and the Fed takes its short-term rate to 4.75% -- a big question is whether longer-term Treasury bond yields could remain at current levels, which are mostly below 4.75%.
Some analysts believe that investors who want to lock in better yields should wait.
“I don’t think there’s any value in the bond market” at current yields, LaVorgna said.
Among the day’s market highlights:
* Gold prices took their biggest tumble since late October, halting the metal’s powerful recent advance to 24-year highs. Near-term futures in New York dropped $7.40 to $521 an ounce amid heavy profit taking.
* Natural gas futures surged 54 cents to $15.38 per million British thermal units, a record high, as frigid weather continued to grip the East and Midwest. Oil futures rose 7 cents to $61.37 a barrel. Natural gas prices have rocketed 150% this year.
* Pfizer led a rally in battered drug stocks after the company raised its annual dividend 26% to 96 cents a share. The stock jumped $1.37 to $22.31; its dividend yield now is 4.3%. Merck rose 49 cents to $28.90 and Eli Lilly gained $1.23 to $55.70.
* Housing-related stocks were higher as long-term interest rates eased. KB Home rose $1.04 to $70.49; cement maker Cemex was up $2.05 to a record $60.80.
Lenders’ shares also were strong. Bank of America gained 76 cents to $46.50. Wells Fargo added 85 cents to $63.20.
* Some tech issues were hurt after Hewlett-Packard issued a disappointing revenue forecast. HP fell 90 cents to $29.07. IBM tumbled $2.25 to $83.71.
* The dollar was little changed after tumbling Monday ahead of the Fed meeting.
