Stocks Settle Lower After Fed Meeting
Updated from 4:21 p.m. EDT
Wall Street's data-inspired rally faded into the close Wednesday, and the major indices finished slightly lower after traders and analysts found themselves struggling to discern the
Federal Reserve's
intentions on the future direction of interest rates.
The
Dow Jones Industrial Average
, up nearly 180 points earlier, squandered all of those gains to end down 11.81 points, or 0.09%, at 12,820.13. The
S&P 500
shed 5.35 points, or 0.38%, at 1385.59, and the
Nasdaq Composite
lost 13.3 points, or 0.55%, to 2412.80.
The story of the day was the Fed, which cut its fed funds target by 25 basis points, taking the overnight interbank lending rate to 2% and extending a series of reductions that have lowered rates by 325 basis points since September. The discount rate, or that at which the Fed lends money to banks, was also lowered by a quarter-point, to 2.25%.
In its decision, the Federal Open Market Committee, the policymaking arm of the Fed, cited financial markets that remain "under considerable stress," a softening labor market, tight credit conditions and the deepening housing contraction.
The downturn in the stock market came as the FOMC set off a debate about
the rate-easing cycle or continue to cut. Notably, the Fed removed language from its statement about risks being weighted to the downside.
"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity," the FOMC statement said.
While a number of observers felt the central bank was signaling that it will keep rates on hold, not everyone was convinced.
Richard Yamarone, chief economist with Argus Research, said, "The Fed's shut the door on rate cuts, but it's unlocked. It's only unlocked in the event that there's some financial calamity which forces them to reopen the door, but for all intents and purposes, I think this rate-cutting campaign has ended."
Brian Bethune, chief financial economist with Global Insight, said: "If the Fed is right, then wonderful. We're finally seeing the light at the end of the tunnel. But if the Fed is premature in terms of the decision to pause, then that could be problematic."
As a result, the market was having trouble digesting the Fed's stance, he said. "I think there's a sense that
traders would love to believe this is the end. But then our gut is telling us that it's too good to be true, and that the headwinds we're facing suggest that the Fed may not have written the final chapter here."
Meanwhile, Marc Pado, U.S. market economist with Cantor Fitzgerald, said the U.S. dollar weakened because he believed the Fed didn't entirely set aside the possibility of further rate cuts.
"People were looking for resistance to come in at 13,000
on the Dow anyway, so they started pounding it," he said. "They weren't pounding it for any fundamental reason. The upside trade had been made, so they just got on it."
Pado noted that there are eight weeks between this Fed meeting and the next. "That's a lot of time for things to change, so I think the statement can be seen as, they're comfortable with this through eight weeks, and then they will reassess."
Yamarone predicted that the Fed will begin to bring rates up again at around December. "I figure they're going to talk hawkishly, via a little open-mouth policy, for the rest of the year," he said. "I don't know that they can really consider raising rates any time soon given the uncertainties in the economy and in the markets. But by the end of the year, things will be on more sound footing."
The Fed also mentioned the relentless upward drive in commodities prices lately and said that it will continue to monitor those developments carefully, but is expecting inflation to moderate in coming quarters.
Still, said Pado, "the Fed could have gotten away with something a lot firmer, especially with oil up around $120. The key to the weakness in that statement was that they still expect inflation pressure to subside in the second half of the year."
Two members of the FOMC-- Richard Fisher of Dallas and Charles Plosser of Philadelphia -- dissented from the decision, preferring no cut at all. Both also disagreed with the last reduction, citing inflationary worries.
Ryan Detrick, senior technical strategist with Schaeffer's Investment Research, said, "in the short term, I think it really shows how much volatility Fed days really do bring. It takes a couple of days for things to play out."
Detrick also noted that the S&P appeared to be approaching resistance at the 1400 level, and that investors may be looking for another catalyst to bring it over the top. "The Fed has done a lot for the market, but what people want to see are economic numbers turning around, and we haven't quite seen that yet," he said.
Following the Fed decision, crude oil -- which closed the regular session down $1.94 at $113.69 a barrel -- tacked on $1.51 in late trading. Earlier, the Energy Information Administration reported that crude stockpiles rose by 3.8 million barrels last week.
Gold futures settled down $11.70 to $865.10 before bouncing $14.60 after hours, and the U.S. dollar slid against both the euro and the yen. The dollar index, which measures the greenback against a basket of major currencies, sank 0.4%.
As for equities, buyers had the edge earlier in the day after the Commerce Department issued a preliminary gross domestic product report that showed growth of 0.6% in the first quarter, a hair higher than consensus and flat with last quarter. GDP numbers often undergo revisions. If they remain substantively accurate, though, they would indicate that the U.S. economy, at least for now, has
, contrary to what many economists and consumers previously believed.
"Call it a banana, call it ice cream, call it a monkey, but you can't call it a recession," said Yamarone, who blames the media for much of the recessionary angst that has spread through the American public over the past few months.
"In order for the economy to be in recession there needs to be, at the very least, one negative quarter in economic growth," Yamarone said. "To date, that hasn't occurred. Claiming recession while economic output is expanding is like diagnosing a patient with the sniffles as having pneumonia. It's incorrect, it's irresponsible, and in our opinion, just another example of election-year fear-mongering."
Yamarone conceded that consumers are facing "great difficulties" in spiking food and energy prices, an uncertain jobs climate and sinking home prices. Still, he believes the economy will "narrowly sidestep recession," barring any other financial calamities, especially now that the stimulus checks are arriving in the first month of the quarter rather than later on.
Pado pointed out that the housing slump alone dragged on the GDP by 1.3%. "Add that back in, and it wouldn't be a robust economy, but it's not the end of the world at just 2%. So there's a portion of the economy that's in a recession, but it's a sector-related situation."
Elsewhere on the economic docket, the April Chicago purchasing managers' index came in at 48.3, indicating a slight contraction in Midwest factory activity. That's a bit better than the 47.5 reading that economists were expecting, and nearly unchanged from March numbers. The index's breakeven point is 50.
Also, ADP said that nonfarm payrolls rose by 10,000 workers in April, far better than the consensus forecast for a loss of 60,000 jobs, and up from a revised gain of 3,000 jobs in March. The government's official jobs report should come out Friday, and the two reports don't always agree.
On the corporate side,
General Motors
(GM) - Get Report
was the Dow's best performer even though the carmaker widened its first-quarter loss. Stripping out certain items, GM topped Thomson Financial's analyst target for a loss of $1.60 a share, posting instead a loss of 62 cents. The stock soared 9.4%.
Fellow industrial
Procter & Gamble
(PG) - Get Report
reported rising first-quarter earnings of $2.71 billion, or 82 cents a share, edging past the consensus estimate by a penny a share. P&G also bumped up the lower end of its current-quarter outlook, and the stock rose 1.8%.
Another Dow component,
Citigroup
(C) - Get Report
, dropped 4% after the banking behemoth announced plans to offer $4.5 billion in stock in order to shore up its dwindling cash pile.
Elsewhere,
Ingersoll-Rand
(IR) - Get Report
tracked up 4.3% on a surging first-quarter profit from continuing operations, but
International Paper
(IP) - Get Report
said rising commodities prices, among other things, helped pull down its first-quarter results, and shares slid 4.2%.
Separately, IT-services firm
Savvis
(SVVS)
was downgraded by at least three analysts after swinging to a first-quarter loss and chopping its full-year sales forecast. Shares plummeted 21.6%.
Among other quarterly reports,
Alcatel-Lucent
(ALU)
and
Garmin
(GRMN) - Get Report
missed estimates, bringing shares down 5.5% and 11.9%, respectively, while
Kraft
(KFT)
guided higher for the year. Kraft shares were up 2.8%.
Time Warner
(TWX)
was slightly worse than expected with its profit, but its shares had a positive start as investors seemed to commend the media company's decision to split off its cable unit,
Time Warner Cable
(TWC)
. But by the close, the stock had surrendered 2.8%. Time Warner Cable ticked up 1.4%.
Roughly 4.5 billion shares changed hands on the
New York Stock Exchange
, with advancers beating decliners by nearly a 5-to-4 margin. Losers edged winners on the Nasdaq, as volume reached 2.19 billion shares.
Treasury prices were little changed, having pulled back from more substantial early gains. The 10-year note ticked up just 1/32 in price to yield 3.82%, and the 30-year bond was flat in price, yielding 4.55%.