August 6, 2021

Stocks Mixed as Traders Wait for the Fed

U.S. stocks rallied to record highs on Wednesday after the Federal Reserve surprised investors and decided against trimming its bond-buying stimulus program, which has fueled Wall Street’s rally of more than 20 percent this year.

The Standard Poor’s 500 Index was up 20.67 points, or 1.21 percent, at 1,725.43. The Dow Jones industrial average was up 146.44 points, or 0.94 percent, at 15,676.17, and the Nasdaq Composite Index was up 37.94 points, or 1.01 percent, at 3,783.64.

Most market participants were expecting the central bank to begin a withdrawal of the bond-buying program by about $10 billion a month.

The committee said it saw recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

Investors had been hesitant to make big bets ahead of what is expected to be the first tentative step by the Federal Reserve to wean the world off its stimulus program that has helped prop up the American economy and equity markets for much of the year.

Traders had generally expected the Fed’s Federal Open Market Committee to make modest cuts to its $85 billion in monthly asset buying, so the decision to keep the program intact, at least for now, came as a surprise.

Many equity options traders appear less worried by the Federal Reserve’s announcement than by Washington’s looming debt and budget battles. Hedges on volatility have been on the rise, but those bets do not look to be specifically tied to the Fed.

European shares were mostly higher, and the FTSEurofirst 300 closed up 0.4 percent, near a five-year closing high hit on Monday.

Markets in other kinds of assets were also suggesting that investors were not too worried about the Fed announcement. The dollar held near a four-week trough against a basket of major currencies on Wednesday, as investors bet that any move by the Federal Reserve to roll back stimulus would be modest.

Adobe Systems, known for its Photoshop and Acrobat software, said it expected subscriber growth to top the 331,000 it added in the third quarter because of strong demand from corporate customers. The stock was up 9.2 percent.

FedEx, the courier company, posted a bigger quarterly profit as it cut costs and its lower-priced ground shipping business did well, sending its shares up 6 percent.

This article has been revised to reflect the following correction:

Correction: September 18, 2013

Due to an editing error, an earlier version of this article misstated stocks’ gains in Wednesday’s stock rally.  Stocks climbed about 1 percent during trading on Wednesday, not 20 percent. Federal Reserve policies have been credited with helping to fuel  a 20 percent rally this year.

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Monetary Policy Statement From the Federal Reserve

Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate. The committee continues to see downside risks to the economic outlook. The committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The committee will closely monitor incoming information on economic and financial developments in coming months. The committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the committee decided to keep the target range for the federal rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 ½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

In determining how long to maintain a highly accommodative stance of monetary policy, the committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the F.O.M.C. monetary policy action were: Ben S. Bernanke, chairman; William C. Dudley, vice chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

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Divisions at Federal Reserve Led to Rate Compromise

At their meeting this month, Federal Reserve policy makers were in strong disagreement, with some advocating aggressive options to stimulate the economy and others pressing to do nothing, according to minutes released on Tuesday.

At the time of the Aug. 9 meeting, the Fed disclosed three dissenting votes — unusual given that most decisions are reached by consensus — but it was not known until Tuesday that there was such a broad array of disagreement and such vigorous debate about the options.

In the end, the Federal Open Market Committee took a middle ground, agreeing to keep interest rates near zero through mid-2013.

In addition to debate about the Fed’s approach to aiding the recovery, the meeting was dominated by sobering assessments of the economy’s disappointing performance this summer and downgrades for growth in the next few months. Since the meeting, the government reported that the economy expanded only 0.7 percent in the first six months of the year.

The meeting minutes for the most part do not identify the members or their views. But some members wanted to engage in another round of so-called quantitative easing, or huge asset purchases, which has become a charged topic in the Republican presidential primary campaign. Some wanted merely to change the composition of the assets the Fed already has. Some wanted to reduce the interest rate the Fed pays banks for their excess reserve balances.

And some wanted to do nothing.

“Some participants judged that none of the tools available to the committee would likely do much to promote a faster economic recovery,” the minutes said.

This broad array of proposals may shed some light on why Ben S. Bernanke, the Fed chairman, spent so much of his long-awaited speech last week in Jackson Hole, Wyo., talking about what Congress, rather than the Fed, should do to help the economy: because even within the Fed there is no consensus on the correct course.

At the Aug. 9 meeting, the members ultimately decided to stretch out their next gathering, in September, to a two-day meeting in part because there was so much disagreement, and Fed officials wanted more time to debate their options.

Officials also came to a temporary policy compromise by giving markets clearer guidance on how long interest rates would continue to hover around zero. Some committee members said they wanted to set a calendar deadline, and others preferred to instead peg interest rates to a specific rate of unemployment or inflation.

The calendar-deadline version won out, and in its public statement the Fed pledged to keep its benchmark short-term interest rate at “exceptionally low levels,” for “at least through mid-2013.”

There were three dissenters: Richard W. Fisher, Narayana Kocherlakota and Charles I. Plosser.

Not only did they disagree with the mid-2013 language, they all disagreed for slightly different reasons.

Mr. Fisher said he did not think further monetary easing would do much, since he “felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation and economic growth.”

Mr. Kocherlakota said he did not believe more easing was appropriate because unemployment had fallen and inflation had risen over the previous year.

And Mr. Plosser worried that the “until at least mid-2013” language might indicate that the Fed’s actions were “no longer contingent on how the economic outlook evolved,” that the Fed’s outlook was “excessively negative” and that the measure would be ineffective at stimulating growth in any case.

The minutes also said that policy makers had expected economic conditions over the summer to have been much better than they turned out and that the Fed was downgrading its projections for economic growth for 2011 and 2012.

Even though some temporary factors might be weighing down the economy, the minutes said, there was worry that “the underlying strength of the economic recovery remained uncertain.”

The participants at the recent Fed meeting did not believe the economy was on the brink of another recession, but some unnamed members indicated that, “with the recovery still somewhat tentative, the economy was vulnerable to adverse shocks.”

Fed officials voiced particular concern about “a deterioration in labor market conditions,” and debated what the longer-term consequences of such high and sustained levels of unemployment might be.

Staff members slightly raised their forecasts for inflation for the rest of this year, indicating that the central bank might be especially unlikely to engage in another round of major asset purchases. These purchases generally raise prices, and the Fed has previously engaged in such quantitative easing in part because policy makers worried that prices might otherwise start falling.

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As Economy Slowly Recovers, Fed Says It Has Done Enough

The nation’s central bank said Wednesday that it would complete the planned purchase of $600 billion in Treasury securities next week as scheduled, then pause its three-year-old economic rescue campaign, leaving in place existing aid programs but doing nothing more, for now, to bolster growth.

At the same time, the Fed said that the economy is expanding less quickly than it had expected. It now projects a growth rate of 2.7 percent to 2.9 percent in 2011, and 3.3 percent to 3.7 percent in 2012. Both projections are considerably below the Fed’s April forecast.

“We don’t have a precise read on why this slower pace of growth is persisting,” Ben S. Bernanke, the Fed’s chairman, said at a press conference Wednesday. “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

The Fed’s policy board, the Federal Open Market Committee, voted unanimously to maintain its two-year-old commitment to hold a benchmark interest rate near zero “for an extended period.” Mr. Bernanke said the language means that the Fed will not raise interest rates for “at least two or three meetings,” pushing back to November the earliest moment rates could increase. Close watchers of the Fed consider it likely that the central bank will hold interest rates near zero well into next year.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” the Fed said in a statement. “The committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline.”

The board also voted to maintain the Federal Reserve’s portfolio of more than $2 trillion in Treasuries and mortgage-backed securities by reinvesting any principal payments in new securities. The investments are intended to hold down long-term interest rates, allowing corporations and consumers to borrow money more cheaply. Studies show that the effort has produced only modest benefits.

Roughly 25 million Americans cannot find full-time jobs, and employers cut back on hiring in May. The Fed said it now projects that the unemployment rate will stand at 8.6 percent to 8.9 percent at the end of 2011, down slightly from the current rate of 9.1 percent. The Fed projected that unemployment will stand between 7.8 percent and 8.2 percent at the end of 2012.

“Recent labor market indicators have been weaker than anticipated,” the Federal Reserve said.

The statement offered hope that the pace of growth would increase, noting that many factors restraining the economy are likely to be temporary, including the impact of higher energy prices and the disruptions to manufacturing caused by the Japanese earthquake. Automakers already are planning sharp increases in production to compensate for the lost volume.

The board remains sanguine about the prospect that price increases will threaten growth. The Fed aims to keep price increases at a steady rate of about 2 percent a year. The price of energy and other commodities spiked earlier this year, but the increases have begun to recede. Moreover, the price of long-term investments continues to reflect little concern about inflation.

“Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable,” the statement said.

This article has been revised to reflect the following correction:

Correction: June 22, 2011

An earlier version of this article understated the size of the Federal Reserve’s portfolio of Treasury bonds and mortgage-backed securities. It is more than $2 trillion, not $2 billion.

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Fed’s 3-Year Rescue Plan Falling Short of Promise

That peak now looks like a long plateau. The Fed still is expected to announce Wednesday that it will halt the expansion of its aid programs at the end of June, as scheduled, when it completes the purchase of $600 billion in Treasury securities. But growth is sputtering, and economists now expect that the Fed will leave its $2 trillion of bandages, props and crutches untouched until next year.

The pace of economic expansion has repeatedly fallen short of the Fed’s predictions, and the central bank is expected to lower its eyes once again when its releases a new forecast after a two-day meeting of its policy board, the Federal Open Market Committee.

Economic forecasters, many of whom also thought 2011 would be a more prosperous year, say that they underestimated the impact of the Japanese earthquake on the production of cars and other goods. They also point to a lack of confidence, an elusive concept that basically defines the willingness of consumers and businesses to spend more money than is justified by current circumstances.

“The most important thing I missed is how fragile confidence is. When anything goes off-script, the impact is magnified by this very fragile psyche,” said Mark Zandi, chief economist at Moody’s Analytics.

Ben S. Bernanke, the Fed’s chairman, said this month in Atlanta that the recovery was continuing at a “moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.”

Mr. Bernanke will again answer questions from reporters Wednesday afternoon, part of a new practice the Fed has initiated to explain its policies and defend its judgments.

Since 2008 the central bank has taken a series of unprecedented steps to arrest the financial crisis and then to restore growth. It is holding short-term interest rates near zero, and has tried to reduce long-term rates by purchasing huge quantities of mortgage-backed securities and Treasuries. The final installment of those purchases is scheduled to take place next week.

Economists do not expect the event to ripple through the economy. The prevailing view is that the impact of the purchases was felt mostly at the time they were announced, based on the total amount the Fed promised to spend, and that markets have not responded to the daily transactions in which the Fed bought those Treasury securities from financial companies.

“Nothing will change on July 1,” said James O’Sullivan, chief economist at MF Global. “Monetary policy will not be that different” because the Fed still will hold the Treasuries on its balance sheet.

Moreover, a number of studies have concluded that the Fed’s efforts have had only a modest impact on the economy. Stock prices have climbed. Corporations have rarely been able to borrow money more cheaply. Mortgage loans have seldom been available at such low interest rates. But companies are hiring few new workers, and people are buying few new homes. Almost 25 million Americans cannot find full-time work, a number that is rising again after declining modestly over the last year.

When the economy faltered last summer, the Fed announced a giant stimulus program. This year, the leaders of the central bank have shown little appetite for another intervention.

Mr. Bernanke and other Fed officials have sought to discourage speculation in recent weeks, arguing that monetary policy cannot address the nation’s fundamental problems, including the collapsed housing market, the federal deficit and trade imbalances with developing nations.

The political backlash against the current round of asset purchases is one reason for the Fed’s timidity. Some at the central bank also see evidence of diminishing returns from additional spending. And the Fed has made clear that it its primary focus is on the pace of inflation, in part because the central bank regards slow, steady price increases as a prerequisite for sustainable job creation.

Last year prices were falling; this year, prices are increasing, and the Fed is frozen as a consequence as it searches for any indication that inflation will exceed its 2 percent speed limit.

“We’re a long way from where we were last summer,” Mr. O’Sullivan said.

The Fed also is waiting to see what Washington will do about its own financial problems. A failure to raise the debt ceiling, the maximum amount the government can borrow, could precipitate a financial crisis. Mr. Bernanke has said that short-term spending cuts could weaken the economy, while a long-term plan to reduce spending could increase growth.

“They won’t rule out anything because they know a lot depends on what the fiscal policy makers do, and that is inherently unpredictable,” Mr. Zandi said.

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Stocks & Bonds: Wall Street Higher After G.D.P. Report

Insurers led the gains as Allstate, Aflac and Lincoln National posted earnings that topped estimates. Sprint Nextel rallied 6.68 percent after it reported a narrower loss.

The Dow Jones industrial average rise 72.35 points, or 0.57 percent, to 12,763.31. The S. P. 500 climbed 0.36 percent to 1,360.48.

“Corporate America has managed to do very well in this environment of sluggish growth,” said Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio. “Earnings are beating estimates. Companies are adding value to their shareholders. There are just not that many alternatives that can compete with corporate America at this point.”

The rise comes a day after stocks rallied on Wednesday as the Federal Reserve renewed its pledge to stimulate growth with low interest rates.

The S. P. climbed to an almost three-year high on Wednesday, and the Russell 2000 index of smaller stocks reached a record after the central bank renewed its pledge to keep interest rates near zero to stimulate the economy. The Federal Open Market Committee agreed to finish $600 billion of Treasury purchases in June.

Another round of buying is not needed to sustain the rally and there will not be an economic slump in the second half, predicted Mark Mobius, the executive chairman of Templeton Asset Management’s emerging markets group.

“We are in a bull market and it will continue,” Mr. Mobius said. “There will be corrections along the way, but these will be very temporary. The consumer in Europe and America is back. They’re not spending like crazy but they are spending.”

The S. P. 500 insurance index rose 1.7 percent, the biggest gain within 24 groups, as 21 of its 22 stocks rallied.

Constellation Energy Group climbed 5.71 percent to $36.26. Exelon Corporation, the operator of nuclear power plants, agreed to buy the power producer for about $7.9 billion in stock, adding stakes in five reactors and becoming the largest electricity marketer in the United States.

Over all, there have been more than 8,000 deals announced globally this year, totaling $794.7 billion, a 26 percent increase from the $629.7 billion in the same period in 2010, according to data compiled by Bloomberg.

Boeing gained 3.19 percent, the most in the Dow, to $78.55. Citigroup raised its share-price estimate for the world’s largest aerospace company to $90, citing positive momentum over the next several years.

The home builder PulteGroup. gained 3.26 percent to $8.24. Pulte forecast profit in the second half of the year. The company focused on cutting costs in the face of weak demand for new homes. Selling, general and administrative expenses for the quarter decreased 10 percent from a year earlier to $136 million. The rate of cancellations declined and visits to the company’s sale centers increased, Richard J. Dugas, chairman and chief executive, said.

Energy shares had the biggest decline in the S. P. 500, falling 0.2 percent as a group.

ConocoPhillips slumped 2.98 percent to $77.45. The company was cut to “hold” at Deutsche Bank, which cited disappointment with first-quarter earnings and said that the outperformance potential was limited.

Akamai Technologies Inc. tumbled 14.74 percent to $34.94. Traffic growth in the company’s volume business has “moderated,” and it was “too early” to predict the pace of growth for the rest of the year, said its chief executive, Paul Sagan.

The Treasury’s 10-year note fell 12/32, to 102 19/32. The yield fell to 3.31 percent, from 3.36 percent late Wednesday.

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Fed President Who Resisted Its Rate Policy Is Retiring

Mr. Hoenig, who has headed the Fed’s Kansas City regional bank since 1991, has opposed the Fed’s efforts to stimulate the economy through an extended period of low interest rates and the purchase of billions of dollars in Treasury securities.

He dissented against those policies at all eight Fed meetings last year. He argued that the Fed’s efforts to spur growth could kindle future inflation.

His departure had been expected because he will reach the mandatory retirement age for Fed bank presidents of 65 in September.

Mr. Hoenig was not joined in his opposition to the policies by other members of the Federal Open Market Committee, the panel of Fed board members and regional bank presidents who set monetary policy. This year, there have been no dissents. Mr. Hoenig does not have a vote on the F.O.M.C. this year.

Mr. Hoenig first joined the Kansas City Fed in 1973 as an economist in bank supervision and his time in that division included the banking crisis of the 1980s. He was involved with regulatory actions on nearly 350 banks that either failed or needed government assistance.

The Kansas City Fed has formed a search committee to select Mr. Hoenig’s successor. The successful candidate will need the approval of the directors who serve on the Kansas City Fed’s board. The search committee will be led by Terry Moore, president of the Omaha Federation of Labor, A.F.L.-C.I.O., who is also a member of the regional bank’s board.

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