Stocks rally on Fed's word that the economy is leveling off

Though problems remain for housing and jobs, the Fed's Open Market Committee sees further improvement in financial markets in recent weeks.

John Gress/ Reuters
John Shepley listens to his headphone as he communicates with traders near the 5-year US Treasury Bond Futures pit at the Chicago Mercantile Exchange Wednesday.

The Federal Reserve is holding the line at close to zero percent on short-term interest rates for the eighth consecutive month. But America’s central banker says the economy is now leveling off, instead of just slowing its slide.

The news helped the stock market continue its summer rally Wednesday. The Dow Jones Industrial Average gained 119.93 points to 9361.38.

The central bankers are not yet talking about economic recovery, economists point out. Instead, the Fed is acknowledging the economy is continuing to make slow progress.

“The Fed’s mind is still in recession,” says Bob Brusca of Fact and Opinion Economics in New York. “It is still not using the word ‘recovery.' "

In its statement, the central bank’s Open Market Committee said, “Conditions in financial markets have improved further in recent weeks.” But, the bank added, “Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”

The bank observed that business is still cutting back on investment in new factories and staffing, but noted that the cutting was bringing inventory stocks in line with sales.

The Fed’s take on the economy is little changed, says economist Scott Brown of Raymond James & Associates in St. Petersburg, Fla. “We are pretty much where we were,” he says. “The Fed is not signaling interest rates will rise anytime soon.”

The Fed did indicate that while it’s continuing its purchase of Treasury Securities, a program which added liquidity to the economy, it would start to taper off its purchase of those securities in October. This action by the bank was designed to counter comments from “inflation hawks,” analysts said.

In its statement, the Fed said it saw no sign of inflation on the horizon. It acknowledged higher prices for energy but added that “substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”

“There is some talk of hyperinflation once the economy recovers,” says Doug Roberts, director of research at Channel Capital Research in Shrewsbury, N.J. “Now, they are putting enough doubt in the markets so you don’t start to see the inflation premium in the economy go wild if the rates shoot up.”

The initial reaction in the bond market was not positive. Traders sold off bonds, raising yields. “The Fed’s purchases were viewed as a measure of market support, and the bond market reacted somewhat badly to it,” says Mr. Brusca.

However, the stock market shrugged off the news, with the Dow Jones Industrial Average keeping its summer rally going, closing up 119.93.

The next Federal Reserve meeting is Sept. 22 and 23. By this fall, the Fed will start to focus on unwinding more of its programs designed to help the economy, says economics professor Sung Won Sohn of the Smith School of Business, California State University, Channel Islands.

“As the economy continues to recover, the exit strategy will become the focal point of policy deliberations in coming meetings,” writes Mr. Sohn, in an analysis. “After all, a firefighter’s first rule of survival is, ‘Know Your Way Out.’ ”
Follow us on Twitter.

of stories this month > Get unlimited stories
You've read  of  free articles. Subscribe to continue.

Unlimited digital access $11/month.

Get unlimited Monitor journalism.