Stocks rally as Fed holds rates steady, Nasdaq closes at record high
Stocks rallied Wednesday as the Nasdaq closed at a new record high after the Federal Reserve opted to leave interest rates unchanged but stressed that the case for a hike in rates has "strengthened."
The Dow Jones industrial average rose 163.74 points, or 0.9%, to 18,293.70 after being up just 28 points before the Fed statement. The Standard & Poor's 500 stock index jumped 23.36 points, or 1.1%, to 2163.12. The tech-heavy Nasdaq composite added 53.83 points, or 1%, to an all-time closing high of 5295.18.
In its statement, the Fed said the "case for an increase in (short-term) rates has strengthened" but that the Fed "decided, for the time being, to wait for further evidence of continued progress toward its objectives" of full employment and inflation moving back up to its 2% target.
Fed holds rates steady in close call; strongly signals Dec. hike
Market watchers interpreted that Fed statement, which had three members dissenting and favoring a hike, as a signal that the odds of a rate hike in December are rising.
Says Luke Bartholomew, investment manager at Aberdeen Asset Management: “It was pretty much a done deal that we weren’t going to get a rate hike today. This meeting has really been about setting the stage for a December hike and what happens after that. The fact that three voters dissented is interesting, and it is pretty clear that the Fed plan on hiking in December this year as things stand."
In addition to holding rates steady, the Fed also downgraded its view of where short-term rates would be at year's end, as well as the end of 2017 and 2018. In general, the Fed now sees short-term rates half of a percetange point lower in 2017 and 2018 than it did back in June, when it made its last projections. The Fed kept its growth outlook for the U.S. economy unchanged at 2% for 2017 and 2018 buit did lower its forecast for 2016 to 1.8% from 2%.
Lowering the trajectory of the future path for interest rates sent prices of U.S. government bonds higher, and yields lower. The 10-year Treasury note yield dipped to 1.661% following the Fed news, down from 1.694% prior to the announcement.
The U.S. dollar also sold off vs. foreign currencies, with the Wall Street Journal dollar index dipping sharply on the news.
The odds of hike in December rose to nearly 60% following the Fed statement, up a tad from before the Fed news, according to CME Group.
Earlier in the day, Wall Street was digesting a new approach to boosting inflation announced earlier by the Bank of Japan.
Jeremy Zirin, chief equity strategist at UBS Wealth Management Americas, says the Fed was expected to hold off on a rate hike today. The Fed has time to wait given that inflation at the consumer level remains below the central bank's 2% target and recent economic data related to both manufacturing and services part of the economy came in weaker-than-expected.
"A December rate hike is more likely," Zirin told USA TODAY. "The Fed doesn't want to be disruptive to the market, and it would clearly be a surprise to the market" if the Fed does hike today.
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Earlier Wednesday in Japan, the Bank of Japan opted not to push a key interest rate further into negative territory, nor did it boost its 80 trillion yen a year asset-purchase program. Instead, the BoJ surprised investors by announcing a "new framework" to combat persistent deflation.
The BoJ introduced a 0% target for its 10-year government bond and also said it will continue to stimulate the economy after inflation has overshot its 2% mandate. Japan's 10-year bond has been trading in negative territory -- or below 0% for awhile now. Earlier today the Japanese 10-year yield creeped up to +0.011%, before dipping back to -0.022%.
Stocks in Japan jumped on the BoJ news, with the Nikkei 225 index closing nearly 2% higher. Stocks were also higher in Europe, where the Stoxx Europe 600 index was up 0.4%, but off its highs earlier in the session.
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Target (TGT) stock got a boost Wednesday after the retailer announced a $5 billion share buy back program.
The new round of stock repurchases will kick off after a separate $10 billion buy back ends before the end of this fiscal year. The news lifting Target’s stock price 1.2% to $69.47 a share.
Contributing: Charisse Jones, New York