Updated from 3:26 p.m. EDT
decision to leave rates unchanged Wednesday came as the stupendous three-month stock market rally was contending with its most chilling foils -- the housing market and energy prices.
Both the stock and bond markets reacted to the Fed with relief that the central bank wasn't more hawkish. But the rate decision came as September existing-home sales data supported the argument that housing remains in a downward spiral. Topping that, the price of crude oil futures was surging past the psychologically important $60 per barrel mark.
In all, the Fed was the least of the market's worries and not much of a help Wednesday as both the funds rate and its policy statement left room for little reinterpretation. Of the 11 voting committee members, only one dissented, Richmond Fed President Jeffrey Lacker. This was Lacker's third time dissenting at a FOMC meeting.
The major stock market indices fought to end the day in the green despite the headwinds of housing and oil. The
Dow Jones Industrial Average
added 0.06% to close at 12,134.68, another all-time high, while the
added 0.35% to finish at 1382.22. The
gained 0.50% to close at 2356.59.
The Comp was aided by strength in
-- up 12% after its earnings report late Tuesday -- and semiconductors, which got a rare dose of good earnings news from
, which rose 8.4%.
"The stock market's reaction was mostly one of relief that the Fed didn't change its view," says Art Hogan, chief market analyst at Jefferies & Co. Absent any surprises from the Fed, the market's chief concerns are earnings season, energy prices and the housing market, Hogan says. Earnings have been strong overall with over 70% of companies beating expectations, but energy prices could quickly get worrisome.
"If we had four days in a row of this kind of oil-price gains, we'd be back in dangerous territory," says Hogan.
Oil gained 3.71%, or $2.20 per barrel to close at $61.55. The surge came on the heels of news that U.S. oil inventories unexpectedly declined. In addition, Iran became the latest OPEC member to cut production and rebels attacked oil platforms in Nigeria.
Housing is still a concern as well, especially when the data stream in to the downside.
On the housing front, existing-home sales fell 1.9% in September, marking the sixth consecutive monthly decline. Prices of existing homes for sale also declined for the second month in a row, falling 1.8% in September. That puts the median home price 2.2% lower now than it was a year ago. The inventory of existing homes remained steady, but still relatively high, at 7.3 months.
Bonds rallied through most of the day on the housing data, which fed into bond investors' pessimistic outlook for the economy. They continued to gain after the FOMC decision. The 30-year Treasury gained 16/32 in price to yield 4.89%, while the 10-year note gained 14/32 to yield 4.76%. The five-year Treasury note ended the day up 8/32 to yield 4.74%.
Soft Landing Gets Strong
Take the housing news in isolation, and the economy doesn't look great. But mix it with the lowest unemployment rate in four years, rising wages, strong consumer spending and healthy corporate profits, and suddenly the economic outlook looks good, if not balanced.
"I could see the 10-year bond yield backing up again," says Andrew Richman, fixed-income strategist for SunTrust Personal Asset Management, which has $8 billion in fixed-income assets under management. The Fed assuaged fears in the bond market that a rate hike was in the cards, but it still didn't point to an ease either, says Richman.
Indeed, the FOMC's statement barely veered from the September or August FOMC statements. The Fed retained its so-called tightening bias, reiterating that economic growth has slowed but that readings on core inflation have been elevated.
The main change was that the Fed added a relatively positive sentence about economic growth: "Going forward, the economy seems likely to expand at a moderate pace," the statement reads. Back in September, the FOMC said: "The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market."
"This makes it clear the Fed is going to stay on hold for a good while," says Richman. "They're saying inflation is above the levels they'd like, but not tremendously above. And they're saying that growth is nowhere near recessionary."
In other words, the so-called soft landing is still on tap.
The Fed has been attempting to toe a fine line, arguing that the slowing economy will stamp out inflation. The change in this month's statement tacks on to the recent Fedspeak that a rate cut is nowhere near on the horizon, but it likewise shies away from any signs of hiking rates as well.
The Fed said "inflation pressures seem likely to moderate over time" reflecting lower energy prices, lower inflation expectations and the lag effects of the Fed's 17 rate hikes through June of this year. The last time the Fed tightened was in June, when it lifted short-term lending rates by a quarter-point to the current level of 5.25%.
"The committee judges that some inflation risks remain," and restated the old saw that "the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
The stock market spent not much more than 15 minutes dealing with the Fed.
Throughout the day, declines in
depressed the Dow, which was conversely aided by
In the financials, asset management firm
T. Rowe Price's
shares declined 3.8% on the company's earnings miss, while
announced strong earnings that sent shares up 2%.
In all, the FOMC's decision was the least disruptive it's been in months. The casual attitude shows investors are turning their gaze away from the central bank when looking for reasons to buy or sell these days.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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