Wall Street appeared to have second thoughts about its initially positive reaction to the Federal Reserve’s policy statement on Wednesday. The Fed did as expected, holding the federal funds rate target at 2.0% at the conclusion of its two-day policy meeting. The central bank expressed concern about inflation, but policymakers didn’t signal that they would be hiking rates in the immediate future.
The diminished prospect of an imminent rate cut appeared to relieve investors. But perhaps the Fed’s assessment that U.S. economic growth still faces significant headwinds gave them pause, capping a solid advance for blue-chip equity indexes.
Bonds eased as stock prices rose. The dollar index fell, as did gold futures. Oil futures plunged on reports of increased U.S. inventory and lower demand.
On Wednesday, the Dow Jones industrial average finished higher by 4.40 points, or 0.04%, at 11,811.83 after posting triple-digit gains earlier in the session. The broader Standard & Poor's 500-stock index also gave back most of its gains, rising 7.68 points, or 0.58%, to 1,332.02. The tech-heavy Nasdaq composite was the best performer among the major market benchmarks, advancing 32.98 points, or 1.39%, to finish at 2,401.26.
In its post-meeting statement, the policy-setting Federal Open Market Committee said that data showed “overall economic activity continues to expand, partly reflecting some firming in household spending.” But the FOMC noted that “labor markets have softened further and financial markets remain under considerable stress.”
“Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters,” the Fed said in its statement.
Regarding inflation, policymakers sounded a cautious note: “The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.”
The Fed said that the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, “should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. “
The Fed said it will “act as needed to promote sustainable economic growth and price stability.”
Dissension continues in the ranks of the FOMC, however, as Dallas Fed president Richard W. Fisher voted instead for an increase in the target for the federal funds rate at the meeting. Fisher also voted for higher rates at the last two FOMC meetings.
Fed watchers immediately began to look ahead to the central bank’s future policy path. “This statement juggles the dual risks to the economy and shows the Fed remains worried both by rising prices and sluggish growth. There's no indication in the statement regarding the timing of when the Fed will start to remove accommodation,” said Action Economics in a Web posting.
"The statement was a bit more hawkish [on inflation risks] than in April," notes S&P senior economist Beth Ann Bovino. However, the Fed’s nod to downside risks to growth means that “there is little indication of any quick tightening,” according to Bovino.
“Nothing within the [Fed’s] statement indicates an imminent rate hike, but the statement represents the second step along the path to an eventual rate hike, with the first step being the April 30 indication at an inclination to stop cutting rates,” wrote Miller Tabak bond strategist Tony Crescenzi in a note. “Today's actual stoppage is the second step. The third step will be a policy statement or major speech that hints at the likelihood of a hike at a subsequent meeting, which means the earliest there is likely to be a hike is Sept. 16,” figures Crescenzi.