WASHINGTON – U.S. stocks rallied this afternoon after Federal Reserve policymakers cut two key interest rates, in the 10th such reduction of the past 16 months.
Some analysts had predicted the Federal Open Market Committee would set a 0-percent target for the benchmark federal funds rate – used for overnight loans between banks – a forecast that missed the mark, but not by much.
Instead, the panel “decided … to establish a target range for the federal funds rate of 0 to 0.25 percent,” the FOMC said as it wound up its two-day meeting. It was the second imprecise target in a row from the usually exacting policymakers.
At the FOMC’s last regular meeting, which ended Oct. 29, the committee voted to lower the funds rate “to an average of around 1 percent.” That action came three weeks after the Fed policymakers shaved the federal funds rate by half a percentage point (50 basis points), to 1.5 percent from the previous 2.0 percent, as part of an emergency action coordinated with rate cuts by central banks in Canada, Europe and China. (READ MORE)
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In the month and a half since the FOMC’s last regular meeting, “labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined,” the panel noted in its statement this afternoon.
“Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further,” the FOMC continued.
“Meanwhile, inflationary pressures have diminished appreciably,” the panel said. ” In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate further in coming quarters.”
In related actions today, the Fed’s Board of Governors unanimously approved a 75-basis-point reduction in the discount rate – used for direct loans from the central bank – to 0.5 percent from the previous 1.25 percent; and it established interest rates of 0.25 percent on required and excess reserve balances held by the Federal Reserve’s regional banks on behalf of U.S. financial institutions.
Going forward, the FOMC said, “the committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
The committee intends to focus on supporting the financial markets and stimulating the economy “through open-market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said in its statement today.
“As previously announced, over the next few quarters, the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets,“ the panel said. Meanwhile, the U.S. Treasury Department is poised to begin infusing capital into the nation’s banks under its Capital Purchase Program, part of the $700 billion Troubled Assets Relief Program (TARP) established by the U.S. Emergency Economic Stabilization Act of 2008 (EESA).
“The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity,” the FOMC concluded.
“They’re trying to rekindle the confidence of consumers and businesses, and that ultimately drives profits in the stock market,” Bruce McCain, who helps manage $30 billion as chief investment strategist at Key Private Bank in Cleveland, told Bloomberg News.
It drove up profits in the short term, as well, fueling a rally that boosted the Standard & Poor’s 500 Index to a five-week high of 913.16 points, or 5.1 percent above yesterday’s close. Other benchmarks also rose: the Dow Jones Industrial Average gained 359.61 points, or 4.2 percent, to close at 8,924.14; the Nasdaq Composite Index rose 81.55 points, or 5.4 percent, to 1,589.89; and the Russell 2000 Index of small companies rose 30.28 points, or 6.7 percent, to close at 482.85, preliminary Bloomberg data show.
“A big, widespread, explosive, incendiary shell has come out of the Fed’s cannon,” Frederic Dickson, who helps oversee about $19 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Ore., told Bloomberg this afternoon. “It’s a bloody big deal. This is the kick-it-up-a-notch moment.”
Treasury securities also rallied, driving yields to record lows, after the Fed policymakers declared the central bank “stands ready to expand its purchases” – and might include longer-term Treasury securities – as it struggles to drive down borrowing costs. Yields on two-, five-, 10- and 30-year U.S. government debt – the yields on which fall as demand rises – tumbled to the lowest level since the Treasury began regular sales of the securities in 1962, according to Bloomberg News.
“Clearly, they’re at a point where reducing rates isn’t going to matter anymore,” Mitchell Stapley, who oversees $22 billion as chief fixed-income officer for Grand Rapids, Mich.-based Fifth Third Asset Management. “They’ve got to get the credit spreads down. That’s what they’re going to do. Any high-quality asset would appear to be fair game for the Fed balance sheet right now.”
Additional information, including the full statement issued today by the Federal Open Market Committee, can be found at www.federalreserve.gov.
