Fed keeps “considerable time” language, boosting stocks

Stocks got a slight boost on Wednesday from the Federal Reserve which, pretty much as expected, reiterated that it would keep interest rates near zero for a “considerable time” after its big bond-buying program ends, likely next month.

After a quick blip downward after the Fed announced the results of its two-day monetary policy meeting, stocks quickly recovered and then rose higher before falling back again in the last hour or so of trading, ending the day about where they started. The Dow and NASDAQ both gained 0.2% while the S&P 500 lagged a fraction behind, closing up 0.1%. Treasury bond yields, which had fallen earlier in the day, ended higher, with the 10-year note closing at 2.62% after having been down as far as 2.55%. The dollar was higher against most major currencies, with the yen falling to 108 against the U.S. currency.

Janet Yellen, at a press conference following the Fed meeting and announcement, didn’t define what “considerable time” meant so as not to lock the Fed into a deadline, adding that any decision about raising rates would be “data dependent.” “I know ‘considerable time’ sounds like it’s a calendar assessment, but it is highly conditional and linked to the committee’s assessment of the economy,” Yellen said in answer to a question. Even so, the Fed raised its median estimate for the federal funds rate to 1.375% at the end of 2015, up from 1.125% at its June meeting. Longer term, the rate is forecast to be 3.75% at the end of 2017. The Fed did reduce its quantitative-easing bond-buying program to $15 billion this month and indicated it will end it in October. Dallas Fed President Richard Fisher joined the Philadelphia Fed’s Charles Plosser in voting against the Fed’s policy statement; Plosser was the lone dissenter at the July meeting.

The Fed also announced new forecasts for U.S. economic growth and unemployment. Its so-called “central tendency” calls for GDP growth of 2.0% to 2.2% this year, rising to 2.6% to 3.0% in 2015 and 2.6% to 2.9% in 2016. The unemployment rate will range from 5.4 % to 5.6% at the end of next year before falling to 5.1% to 5.4% at the end of 2016.

Asian stocks were mostly higher, led by China, where the government announced a stimulus program. Hong Kong’s Hang Seng index rebounded 1%, its first increase after eight straight losing sessions, after the People’s Bank of China injected 500 billion yuan ($81 billion) in the form of low-rate loans into the nation’s five largest government-owned banks over the next three months to try to stimulate growth in the economy. The Shanghai composite gained 0.5%, as did India’s Sensex. But Japan’s Nikkei 225 fell 0.1%.

European stocks were also mostly higher except in London, where stocks fell as Scottish voters prepare to go to the polls tomorrow to vote on whether to leave the United Kingdom. The FTSE 100 fell 0.2%; late surveys indicate that “yes” votes (those favoring secession) are slightly ahead of “no” votes. Elsewhere, prices were generally higher. The Stoxx Europe 600 rose 0.5% and Germany’s DAX rose 0.3%, while prices in Spain and Italy jumped 1% or more. Sovereign bond prices were also generally higher as Germany sold two-year notes at minus 0.07%, the lowest rate on record. The previous sale on August 20 went out at zero percent.

Reports/dates/facts/links worth paying attention to over the next week:

  1. September 18: Scotland’s independence referendum; U.S. housing starts (September); weekly unemployment claims; Philadelphia Fed survey (September).
  2. September 19: U.S. leading economic indicators (August); Atlanta Fed’s business inflation expectations (September).
  3. September 22: Chicago Fed national activity index (August); existing home sales (August).
  4. September 24: New home sales (August).
  5. September 25: Durable goods orders (August); weekly unemployment claims.
  6. September 26: Second quarter GDP, first revision; University of Michigan consumer sentiment index (September).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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