Fed Sparks Stock Rally

Stocks soar after the FOMC policy statement signals a softer tone on interest rate hikes.
Author:
Publish date:

Updated from 4:16 p.m. EDT

Stocks soared Wednesday after the

Federal Reserve's

latest policy statement took a seemingly softer tone about interest rate tightening.

The

Dow Jones Industrial Average

surged 159.42 points, or 1.3%, to 12,447.52. The

S&P 500

added 24.10 points, or 1.71%, to 1435.04, and the

Nasdaq Composite

gained 47.71 points, or 1.98%, to 2455.92.

With the rally, the Dow is now just 15 points below the unchanged mark for the year. Both the S&P 500 and Nasdaq moved back in positive territory for the year.

The major averages spent much of the day treading water before the Federal Open Market Committee's 2:15 p.m. EDT policy statement. The central bank decided to keep its federal funds target unchanged at 5.25% for the sixth straight meeting, an outcome that had been widely expected on Wall Street.

The FOMC said in its policy statement that while recent indicators have been "mixed" and the adjustment in the housing sector is ongoing, "the economy seems likely to continue to expand at a moderate pace over coming quarters."

The Fed also said that readings on core inflation "have been somewhat elevated," and that "the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

However, the Fed dropped the pronouncement that the "extent and timing of any additional firming that may be needed" will depend on economic data, and instead used the more neutral term of "future policy adjustments."

"This is a grudging removal of the tightening bias," said Ian Shepherdson, chief economist with High Frequency Economics. "The Fed is not quite as worried about inflation but is not yet sufficiently relaxed to abandon the idea it might have to hike again. Despite 'mixed' data and the 'ongoing' housing 'adjustment,' the Fed still expects 'moderate' growth."

Paul Mendelsohn, chief investment officer with Windham Financial, interpreted the Fed's comments as a little hawkish.

"The change to inflation speak is really disconcerting," he said. "Still, the statement showed some confidence in that nothing is abnormal or unusual. The market looks like it wants to go higher and test technical levels."

Treasuries also rallied after the announcement. The 10-year note climbed 10/32 in price, yielding 4.53%, and the 30-year bond was up 5/32 and yielding 4.70%. The dollar was rising against other major currencies.

Roughly 3.16 billion shares changed hands on the

New York Stock Exchange

. Advancers beat decliners by a 9-to-2 margin. Volume on the Nasdaq reached 2.19 billion shares, with winners outpacing losers 11 to 4.

The Philadelphia Housing Sector Index also jumped following the Fed's announcement, ending higher by 2.6%. Also on the winning side, the Amex Airline Index rose 3%, the NYSE Financial Sector Index gained 2.2%, and the Philadelphia Semiconductor Sector Index climbed 1.7%.

Elsewhere, energy prices were higher following the Energy Department's weekly inventory report. The new front-month May contract was higher by 36 cents to $59.61 a barrel, and natural gas jumped 25 cents to $7.16 per million British thermal units.

Earlier, the Energy Department's report showed a greater-than-expected build of 4 million barrels in crude inventories. However, gasoline stocks fell by 3.4 million barrels, more than double expectations, and distillate inventories declined by 1.7 million barrels.

Metals prices were mixed. Gold added $1 to finish at $660 an ounce and silver was lower by 5 cents at $12.32 an ounce.

Turning to the earnings front, after the previous close,

Oracle

(ORCL) - Get Report

got past analysts' sales and profit expectations in the third quarter. The midpoint of the company's guidance for the current quarter was a bit short of estimates, but the software maker's shares still added 62 cents, or 3.5%, to close at $18.17.

Also better than the consensus forecast was

Adobe Systems

(ADBE) - Get Report

, whose shares rose $2.56, or 6.3%, to $43.30.

Meanwhile,

Morgan Stanley

(MS) - Get Report

surged by analysts' earnings targets, becoming the latest big investment bank to post strong quarterly numbers. Morgan Stanley climbed $5.22, or 6.9%, to end at $81.33.

Parcel shipper

FedEx

(FDX) - Get Report

said its quarterly revenue climbed more than 7% year over year, and the company offered in-line guidance for the fourth quarter and fiscal year. However, the company said 2008 earnings may decline because of a slowing economy, and shares eased $1.30, or 1.2%, at $110.99.

Among ratings moves, JPMorgan upgraded

Clorox

(CL) - Get Report

to overweight from neutral, while Goldman Sachs raised

OfficeMax

(OMX)

to buy from neutral. Clorox gained 2.9% to $64.68, while OfficeMax rose 4.7% to $53.10.

Meanwhile, Prudential cut

Alcoa

(AA) - Get Report

to neutral from overweight and

Alcan

(AL) - Get Report

to underweight from overweight. Alcoa lost 0.7% to $33.85, while Alcan edged 0.2% higher to $53.20.

Asia's stocks were mostly higher overnight. Hong Kong's Hang Seng gained 0.8%, and China's Shanghai and Shenzhen 300 was up 1.1%. Japan's markets were closed. Europe was also stronger, with London's FTSE 100 rose 0.5% and Frankfurt's Xetra DAX added 0.2%.