Investors can’t decide if they love or hate the Fed’s interest rate decision.
Stocks swung between big gains and losses on Thursday after the Fed kept rates near zero due to concerns about global growth.
The Dow was recently down by 10 points, giving back an earlier gain of nearly 200 points. The Nasdaq was up 0.3%.
Wall Street struggled to decide how to interpret the Fed decision and what it means about the health of the U.S. economy. Investors are also searching for clues about when a rate hike could happen.
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.
During a press conference, Fed chief Janet 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.”
The mention of turbulence in equity markets won’t sit well with some Fed watchers.
“The Fed runs the risk of being held captive to the markets, as, paradoxically, much of that volatility is due to the anticipation and uncertainty around when the Fed will move,” Joe Davis, Vanguard’s global chief economist, wrote in a blog post.
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. Yellen reiterated that rates could be increased in October — even though no press conference is scheduled following that meeting.
Fed fatigue grows
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.”
Market veterans remain divided over whether a rate hike will 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.
Fed winners & losers
Utility stocks loved the Fed’s decision to stand pat. Investors are betting these high-dividend stocks will continue to feast on cheap borrowing costs. Big winners include PG&E and DTE Energy.
On the other hand, banking stocks like Bank of America, Fifth Third Bancorp and Comerica retreated. The industry had been hoping the Fed would move because higher rates make it easier for banks to make money on loans.
