Not Much Ado About the Fed

The central bank essentially leaves its statement unchanged.
Publish date:

Updated from 3:03 p.m. EDT

There's an old saying that a trader's


trade, but what's the trade when there's nothing to trade on? Wednesday's announcement by the

Federal Reserve's

Open Market Committee was as expected, and the markets mostly yawned. The central bankers raised the fed funds rate yet another one-quarter point to 2.5% and issued a

statement that barely diverged from its statement in December.

There were a few observers who expected the Fed might signal it was moving to a more aggressive stance. Futures markets put a 4% chance on a one-half point rate hike. The Fed could also have moved more subtly by upping its assessment of inflation risks or dropping its promise to move at a "measured" pace in the future. There was none of that.

The yield on the 10-year Treasury note barely fluttered and was around 4.15% both before and after the announcement, then finished at 4.14%. Stocks caught a minor bid in the wake of the FOMC news that didn't last as the

Dow Jones Industrial Average

went all the way up to 10,616 on the announcement, bounced a bit and then closed up 0.4% at 10,596.79. The

S&P 500

rose 0.3% to 1193.19 after trading as high as 1195.25, and the

Nasdaq Composite

added 0.3% to 2075.06, not far from its apex of 2079.58.

Internals looked healthier on the

Big Board

as volume ticked up from Tuesday and breadth was positive by almost 2 to 1. On the


, volume declined and gainers only outnumbered losers by 11 to 8.

Away from


(GOOG) - Get Report

, which rose 7% to $205.96 on its blowout fourth-quarter earnings report, casinos, shippers and energy stocks showed strength.

Las Vegas Sands

(LVS) - Get Report

rose 4%,

Frontline Ltd.

(FRO) - Get Report

jumped 4%, and

Devon Energy

(DVN) - Get Report

gained 3%.

Steady as She Goes

The Fed made no real changes in assessing the economy, which it said was still "growing at a moderate pace." With mediocre payroll growth in the fourth quarter and no word on January until this Friday, the Fed again said labor conditions "continue to improve gradually."

"The widely anticipated rate hike -- the sixth in as many meetings -- was a bit of a yawner," Rich Yamarone, director of economic research at Argus Research, wrote in a quick reaction. He expects the fed funds rate to get as high as 3.75% by year-end.

Several fed officials in recent speeches had raised the specter of a growing risk of inflation. Commodity prices remain elevated, even apart from oil, which is again pushing $50 a barrel. The only minor tweak in the Fed's statement was to drop the word "earlier" from a description of the rise in energy prices. (I guess regular unleaded is back up to $2 a gallon at Mr. Greenspan's hometown pump.)

The dropped word could be a sign that the Fed views higher energy prices a "permanent feature of the landscape," economist Pierre Ellis at Decision Economics wrote after the announcement. That means no added stimulus from future falling prices and no beneficial drop in inflation, Ellis noted. Absent any hints of changing policy, Ellis recommends looking to Greenspan's testimony before Congress on Feb. 16 and the release of the minutes of this week's meeting on Feb. 23.

There were no signs of increased concern in the statement released Wednesday. "Inflation and longer-term inflation expectations remain well contained," the Fed said -- just like last time.

Similarly, there were no signs that the Fed is ready to pause either. Even after the hike, the fed funds rate is low enough to encourage further growth, or "remains accommodative," the Fed said.

Yamarone backs that assessment up with some historical research. Using the Fed's preferred inflation measure, the personal consumption expenditure deflator index, the "real" fed funds rate is negative 0.6% compared to an average of 2.5% since Greenspan took over the Fed in 1987 and almost 1% over the past five years, he deduced.

Pimco's Bill Gross is one of the standard guests on


on Fed announcement days. On Wednesday, he didn't have many predictions about what would happen next. Last year, the bond market thwarted his calls for higher long-term rates.

As it stands, the 10-year is well below the 4.70% level at which it stood before the first Fed rate hike last June. That's also helping stimulate the economy, particularly in housing.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.