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Stocks Stay Afloat After Fed Comments

Mike Taylor

Stocks in the U.S. got a nudge higher Wednesday afternoon as the Federal Reserve voted to leave overnight bank lending rates unchanged.

The Dow Jones Industrial Average was up 101 points at 11,908, and the S&P 500 was adding 20 points to 1334. The Nasdaq was up 52 points at 2420.

As expected, the Fed opted to leave its fed funds target interest rate unchanged after concluding a two-day meeting. The question surrounded what the Fed's policymaking arm, the Federal Open Market Committee, would offer in its assessment of the economy.

The central bank finds itself in a difficult spot, and it acknowledged as much in its statement that accompanied the rate decision. While downside risks to growth remain, they have been diminished, the Fed said, though it did express concern about the state of the labor market. At the same time, Fed officials believe inflationary pressures are a risk to the economy.

"Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters," the Fed said. "The [FOMC] expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."

A months-long easing campaign in the wake of the credit crisis had dropped the overnight lending rate from 5.25% last summer. The Fed has been stuck between keeping the mortgage meltdown from dragging the economy into a recession and dealing with worries about resource-driven price inflation.

While the Fed has moved aggressively to lower borrowing costs, most experts believe no further rate reductions are forthcoming, and that instead, the next change, when it does occur, will be a hike.

"I think there was some feeling out there that they may change course and raise rates, but they stayed the course, and that's why we're seeing a mildly positive reaction at this point," said Matt King, chief investment strategist at Bell Investment Advisors.

Earlier, European Central Bank President Jean-Claude Trichet signaled that ECB officials could be close to lifting rates on the continent in a bid to cool off inflation there.

Chip Hanlon, president of Delta Global Advisors, said that the market had priced in its expectation that the Fed would remain on the sidelines. "It would take a surprise from the Fed to move the market," he said. "I think today is more about oil."

Crude oil inventories increased by 803,000 barrels, compared with expectations for a decline of 1.1 million barrels. Oil fell on that news, but slowed its decline after the Fed statement. The price of oil was recently down $2.48 to $134.52 a barrel. Gold was gaining $3.80 at $886.10 an ounce.

"My guess is that the way the bigger money is taking it is that the statement wasn't strong enough to skyrocket the dollar, so it wasn't enough to short-circuit oil," said Joseph Clark, founder and managing partner at the Financial Enhancement Group. He said the market, lacking fundamental catalysts, will probably remain range-bound in the immediate future.

Among companies in the headlines, MasterCard (MA Quote) agreed to pay $1.8 billion to settle litigation brought by American Express (AXP Quote), which had alleged the company conspired to keep it out of the bank-issued credit card market. MasterCard was up about 5%, and American Express was trading even.

Staying in financials, Britain's Barclays (BCS Quote), stung by the same financial slowdown that has deviled its U.S. counterparts, set plans to raise nearly $9 billion through a stock offering. Shares were recently up 5%, adding to a broad rally in the sector.

As for earnings, crop-science concern Monsanto (MON Quote) said its third-quarter earnings jumped more than 40%, while revenue surged 26% to $3.59 billion. The company also raised its forecast again.

Cereal maker General Mills (GIS Quote) wasn't as fortunate, saying its fourth-quarter profit dropped as the positive effects of commodity hedges wore off. Still, the numbers were in line with its preview issued last week.

After the close today, traders will take in financial results from Nike (NKE Quote), Oracle (ORCL Quote) and Research In Motion (RIMM Quote).

The tech sector saw a broad rally as Jabil Circuit (JBL Quote) forecast earnings that would beat the Street's expectations. Jabil shares were rising 14%. Nokia (NOK Quote) also led the sector, up 6%.

Elsewhere, JPMorgan initiated ratings coverage on the pharmaceutical sector. It put a neutral rating on Wyeth (WYE Quote), Eli Lilly (LLY Quote) and Bristol-Myers (BMY Quote). Schering-Plough (SGP Quote) garnered an overweight rating.

AT&T (T Quote) saw shares rise on a Bernstein upgrade to outperform from market perform. Shares gained 2%. Sprint (S Quote) shares were also rising 6%.

Boeing (BA Quote) fell 7% after Goldman Sachs downgraded the stock to sell. Honeywell (HON Quote), Textron (TXT Quote) and others in the defense space fell alongside Boeing.

On the data side, the Commerce Department said durable-goods orders were unchanged in May, whereas economists were looking for a decline of 0.5%. The U.S. Census Bureau and the Department of Housing and Urban Development also released May new-home sales. The government found that, as expected, new single-family homes sold at a seasonally adjusted annual rate of 512,000, down from 525,000 in April.

Stocks in the homebuilding space were generally upbeat. Lennar (LEN Quote) and NVR (NVR Quote) were gaining ground.

Treasury prices were on the decline. The 10-year note fell 9/32 in price to yield 4.12%. The 30-year was down 10/32 to yield 4.66%. The dollar was losing ground against the euro and holding steady against the yen.

Abroad, markets were also climbing. London's FTSE added 0.6%, and Frankfurt's DAX gained 1.3%. The Paris Cac jumped 1.4%. In Asia, Japan's Nikkei lost 0.1%, and Hong Kong's Hang Seng was up 0.8%.