Stocks gained momentum on Thursday after Fed chief Janet Yellen reassured investors about the health of the U.S. economy.
Yellen explained that the Fed’s decision to keep rates near zero was largely based on concerns about global growth, including China. She sounded far less concerned about the U.S.
“The economy has been performing well and is expected to continue to do so,” Yellen said.
The Dow gained 150 points. Earlier it was vacillating between small gains and losses after the Fed announcement.
Fed decision remained mystery to Wall Street
The Fed decision was one of the most highly anticipated events in recent Wall Street history. It has the power to significantly influence the course of stocks, bonds, currencies and overseas markets not just on Thursday, but for months to come.
It’s “the most widely debated, dissected, analyzed and now traded capital markets event in my 25 years on the Street,” Nicholas Colas, chief market strategist at ConvergEx, wrote in a note to clients.
The Fed has indicated that a rate hike is still possible by the end of the year. There are two more meetings scheduled — in October and December.
“You’re likely to get a hike later this year. The Fed just bought themselves a little bit more time,” said Russ Koesterich, global chief investment strategist at BlackRock.
Global growth, financial jitters kept Fed on hold
Traders had been correctly betting against a rate hike due to turbulence in financial markets created by global growth worries fueled by China. All you need to do is recall the unprecedented 1,000-point Dow plunge on August 24.
Yellen explained the Fed decided to keep rates near zero in light of the uncertainties abroad. She specifically pointed out “notable volatility in financial markets,” including the stock market, in recent weeks.
However, Yellen emphasized she did “not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook.”
Rate hike in October or December?
Many economists believed a rate bump would finally happen because labor markets have improved drastically and the Fed needs ammo (room to lower rates) for the next emergency.
While it didn’t hike rates this meeting, most Fed committee members believe a rate increase will happen later this year, according to its economic projections. The Fed has two remaining meetings this year — in October and December.
Fed fatigue grows
At the same time, investors (and financial journalists) are tiring of the endless debate over Fed policy. It’s fueling uncertainty that markets hate.
“The Fed punted again and thus are inviting us to the daily obsession” of when it will hike rates, said Peter Boockvar, chief market analyst at The Lindsey Group. “The problem now is not when the Fed will raise rates or not, it is the paralyzing discussion.”
There was even debate over whether a rate hike would help or hurt stocks.
The stock market has been a big winner of the Fed’s emergency policies. Near-zero rates make risky assets like stocks more attractive than keeping cash in the bank, where it would earn nothing at all. So it stands to reason that stocks could react negatively to a rate hike.
On the other hand, a rate hike would represent a vote of confidence in the state of the U.S. economy — and vice versa. A stronger economy is great for corporate profits and thus stocks.
