Wall St Ends up Sharply after Fed Signals Patience

Ann Santiago
February 1, 2019

In another significant move, the committee said will continue to run monetary policy in an ample-reserve regime, where control over short-term interest rates "is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required". Since the beginning of the year, the value of USA stocks has increased by $2.1 trillion, or 7.74%, according to Wilshire Associates.

By removing references to further rate hikes, the central bank indicated that it's not going to move prematurely on raising interest rates.

After the Fed statement, USA stocks added to gains with the S&P 500 index rising 1.5 percent, while the dollar and short-term yields fell as investors gauged an even lower probability of additional rate hikes any time soon. The S&P 500 index was up 41.05 points at 2,681.05, while the Nasdaq composite was up 154.79 points at 7,183.08.

Its message ignited a rally on Wall Street, which cheered the prospect of continued modest borrowing rates for the near future.

The balance sheet, another concern for investors, was addressed in a separate statement in which the Fed said it "is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments".

"What investors most like is that they got more than they expected" from the Fed, said Mr Art Hogan, chief market strategist at National Holdings Corporation.

The Fed and its chairman, Jerome Powell, pointed to global economic pressures and consistently mild inflation as reasons to keep rates steady.

Officials at the United States central bank cited muted inflation and "global economic and financial developments" to explain the shift.

Of course, the Fed didn't specifically say that its campaign to bring interest rates back to more normal levels was over.

It said U.S. economic activity was rising at a solid rate, as it maintained the target range for federal funds rate at 2.25-2.5 per cent.

The downgrade in the Fed's language around rate increases included a change in its description of economic growth from "strong" to "solid", and it noted that market-based measures of inflation compensation have "moved lower in recent months".

The Fed raised rates four times last year including in December, when it signaled it would do so twice more this year. He didn't comment on the Fed's actions on Wednesday, but he did tweet "Dow just broke 25,000".

Market watchers were surprised by the Fed's latest signals on its balance-sheet unwind, which suggests the central bank is closer to completion than previously expected.

The MSCI world equity index, which tracks share performance in 47 countries, rose 1.2 percent following gains in Asia overnight.

Microsoft Corp and Facebook Inc, set to report after the closing bell, rose 3 percent or more.

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