Updated from 2:49 p.m. EST
As expected, the
Federal Open Market Committee left its benchmark
fed funds rate unchanged Wednesday at 1.75%. The committee said in its statement accompanying the decision that risks remain weighted toward weakness, although evidence of a recovery is mounting.
"Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the committee said. "With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favorable and monetary policy accommodative, the outlook for economic recovery has become more promising."
All things considered, however, the economy isn't out of the woods. "The degree of any strength in business capital and household spending, however, is still uncertain. Hence, the Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," said the statement.
Stocks fluctuated following the announcement, but ultimately closed well above levels held just before the decision was disclosed. The
Dow Jones Industrial Average closed up 145 points at 9763, compared with a 39-point gain shortly before the decision. Gains in the blue-chip index were led by
as well as retailers
S&P 500 finished 13 points higher to 1114, and the
Nasdaq Composite Index gained 20 to close at 1913.
While still cautious on continuing risks, the FOMC statement released Wednesday was more optimistic than the one released at the December meeting, and that's good news for stock market bulls, said Miller Tabak strategist Peter Boockvar. If the economy is indeed on the road to recovery, then corporate profits should be set to grow, which would in turn boost stocks.
Tim Truebenbach, President and General Partner of True Capital Management, said the Fed's decision and statement is a positive for the stock market, but might not enough to put the breaks on the pullback seen so far this January.
"The Fed is always looked upon as the ultimate economist, so this helps quite a bit. This is a kind of confirmation that things are getting better," he said. But stocks won't do really well until the second half of this year, Truebenbach said, when he thinks the Nasdaq should push past 2000 and the Dow could hurtle over the 10,000 mark.
The FOMC's decision could mark an end to the most aggressive rate cutting campaign since Alan Greenspan took over as chairman of the
Federal Reserve in 1987. The Fed cut interest rates 11 times last year in an attempt to jump-start a deteriorating economy, lopping off 425 basis points and dropping rates to their lowest level in 40 years.
Until a week ago, some market participants expected another rate cut out of this week's meeting. Around the middle of the month, Greenspan delivered a dour speech that seemed to hint at a 12th-straight easing. But he backed off the pessimism last week in an address to Congress, saying he'd seen signs the economy was turning.
The economy contracted by 1.3% in the third quarter of last year -- its biggest drop since early 1991 and the National Bureau of Economic Research has declared that the economy is in a recession. But
signs of a bottoming in the economy have begun to accumulate, including a
positive read on the advance estimate of fourth-quarter GDP this morning. Inventories were washed out at a rapid pace, and consumer and government spending surged. Meanwhile, weekly jobless claims have been steadily declining since October, consumer confidence is up, and several pieces of manufacturing data, including December durable goods orders, have shown an improving picture for that sector.
Most economists have already turned their focus to when the Fed will begin
raising rates. But a rate hike is likely some ways off given this morning's statement that the risks are weighted toward weakness.
If a rate hike were to come soon, it might spell trouble for stocks, said Stanley Nabi, managing director of Credit Suisse Asset Management. "I don't think the end of the rate-cutting campaign will have much of an impact
on the stock market in next few months, unless it becomes visible that the Fed is going to reverse course, and very aggressively," he said.
At least one economist thinks there is a possibility that the Fed could ease again later this year. The first stage of a classic economic recovery comes from inventory rebuilding among companies that have depleted their stocks. But a sustained rebuilding of inventories depends on a pickup in demand. If demand doesn't lift, Greenspan might consider cutting rates in the spring or summer, says Salomon Smith Barney economist Mitchell Held.