The Federal Reserve just gave investors a big belated Christmas present.
Six weeks after raising interest rates and signaling that more increases would come this year, the central bank all but said Wednesday that it was done tightening credit for the foreseeable future.
Finishing up their first two-day meeting of the year, Fed officials said they voted to keep their benchmark rate steady and said they would sit back and assess a broad range of economic data before deciding whether rates needed to move higher or lower.
“The case for raising rates has decreased somewhat,” Fed chairman Jerome Powell said at a news conference following the rate announcement. Asked what would prompt another rate hike, Powell said: “I would want to see a need for further rate increases, and for me, a big part of that would be inflation. It wouldn’t be the only thing, but it would certainly be important.”
There was an added bonus for those on Wall Street concerned about the Fed’s plan for shrinking its $4 trillion bond portfolio. Officials indicated they would probably hold on to more of those bonds — a plus for investors — and would not actively manage reserves in the banking system to influence rates.
Stocks, already up on the day, climbed even higher, with the Dow Jones industrial average gaining nearly 435 points, or 1.8 percent, to close at 25,014.86. The S&P 500 index added 1.6 percent, while Nasdaq Composite climbed 2.2 percent.
The yield on the 10-year Treasury note — which moves in the opposition direction of price — declined to 2.69 percent from about 2.73 percent before the Fed announcement at 2 p.m.
Of course, the Fed didn’t specifically say that its campaign to bring interest rates back to more normal levels was over.
After nine increases since the end of 2015, its target for the federal funds rate — the basis for the cost of credit card borrowing and auto loans — stood at 2.25 percent to 2.5 percent, compared with 0.5 percent three years ago. Before the financial crisis hit in 2008 it had reached 5.25 percent.
But with just a few key changes to the Fed’s post-meeting statement and in scripted comments during his news conference, Powell left no doubt that officials believe the prospects for the US economy weren’t as bright and the risk of inflation not a strong as they were on Dec. 19, when the Fed last boosted rates.
A few examples of the art of Fedspeak:
■ In its statement on Wednesday, the Fed said “economic activity has been rising at a solid rate.” Last month, the adjective used was “strong.”
Read: Growth is moderating.
■ In December, inflation indicators were “little changed” near the Fed’s target of 2 percent. On Wednesday, the statement said “market-based measures of inflation compensation have moved lower in recent months.”
Read: There is no need to worry about rising prices.
■ Last month, the Fed said that “some further gradual increases” in rates this year were consistent with its goals of promoting strong employment and price stability. On Wednesday, there was no mention of tightening. Instead, the Fed said its policy-making committee “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”
Read: We’re good for now.
“The Fed tightening cycle that began slowly at the end of 2015 and continued to December 2018 is officially over,” said Michael Arone, chief investment strategist of the US SPDR business at State Street Global Advisors in Boston, voicing what was the consensus reaction on Wall Street.
So what has changed since December to change the Fed’s mind on rates?
“We are now facing a somewhat contradictory picture of generally strong US macroeconomic performance, alongside growing evidence of cross-currents,” Powell told reporters.
Among those cross-currents: slowing economic growth in China and Europe, uncertainty caused by Brexit and the US-China trade fight, and the impact of the recently ended federal government shutdown.
Powell also said that financial conditions — stock prices and borrowing rates, for example — had become less friendly to growth.
“At such times, common sense risk management suggests patiently awaiting greater clarity,” he said.
Those words will likely be welcome by President Trump, who had repeatedly blasted the Fed — and Powell by name — as it raised rates four times last year. He didn’t comment on the Fed’s actions on Wednesday, but he did tweet “Dow just broke 25,000. Tremendous news!”
The Dow is up almost 15 percent since its recent trough on Dec. 24. But it remains almost 7 percent below its record high of 26,828, reached on Oct. 3.
It may not be long before that record is broken.
“As long as the US economy continues to grow and corporate profits climb, I expect cyclical sectors aligned with the economy’s growth continue to lead the bull market higher in the near term,” said State Street’s Arone.
“Any positive news from the US-China trade negotiations or a softening of the divisive rhetoric coming out of DC should also bolster share prices.”You can reach me at firstname.lastname@example.org
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