US stocks rally after Fed’s inflation comments
Reassuring words from the Federal Reserve triggered a late-session stock rally today, as minutes from the Fed's March 22 meeting showed it planned to stick with "measured" interest rate hikes, at least in the short term.
A sharp drop in oil prices also helped Wall Street recover.
While the possibility of higher and more aggressive interest rate hikes remained a concern, investors were relieved to see that the Fed's Open Market Committee was willing to keep interest rate hikes minimal even as signs of inflation in the economy increased.
The Fed raised the US benchmark rate by a quarter percentage point at that meeting to 2.75%, the seventh such increase since last summer. In keeping to their consistent pattern, policy makers noted that productivity remained strong and would help keep inflation in check - something many investors had been hoping to hear.
"What the Fed's saying here is basically that the economy is doing all right and that we've got our eye on the ball," said Bryan Piskorowski, market analyst at Wachovia Securities. "The market was going into this expecting the worst, and now that we see a little less hawkish demeanour with this announcement, the market's got some wiggle room."
The Dow Jones industrial average rose 59.41, or 0.6%, to 10,507.97.
The Dow had fallen more than 87 points earlier in the session, nearing its intraday lows for the year before the Fed minutes were released.
Broader stock indicators also reversed their earlier losses and gained ground. The Standard & Poor's 500 index was up 6.55, or 0.6%, at 1,187.76, while the Nasdaq composite index gained 13.28, or 0.7%, to 2,005.40.
Oil prices dropped for the sixth time in the past seven sessions after the International Energy Agency forecast slower growth in demand. A barrel of light crude settled at US$51.86 (€40.17), down US$1.85($1.43), on the New York Mercantile Exchange.
Bonds rose sharply after the Fed minutes were released, with the yield on the 10-year Treasury note falling to 4.36%, down from 4.44% late on Monday. The dollar made gains against other major currencies, while gold prices fell.
Stocks fell early in the session after the Commerce Department said the US's trade deficit hit an all-time high in February, a 4.3% increase over January that was far more than economists had expected.
The trade deficit news initially heightened fears that the Federal Reserve would have to raise interest rates aggressively to shore up the dollar. But the Fed minutes assuaged those fears, at least for the short term.
"Even without the Fed minutes, you still have oil and you still have interest rate fears and inflation," said Jack Ablin, chief investment officer at Harris Private Bank. "We have earnings reports, and that may help some, but the big fears are still there."
In company news, American International Group climbed 1.10 to 53.20 after analysts at Merrill Lynch reiterated a "buy" rating on the Dow component's stock. The move came as former Chairman Maurice "Hank" Greenberg met regulators to answer questions about the company's business practices. A source said Greenberg invoked his Fifth Amendment rights and refused to answer.
Verizon Communications plans the sale of 132 million additional common shares to raise nearly 8.2 billion, which would more than cover the costs of acquiring MCI. Verizon added 29 cents to 35.19, while MCI was up 8 cents at 26.09.
The Russell 2000 index of smaller companies was up 5.86, or 1%, at 613.03.
Advancing issues outnumbered decliners by about 8 to 5 on the New York Stock Exchange. Volume was heavy as trading picked up in the afternoon following the release of the Fed minutes.
