U.S. stocks and bonds got a lift from the Federal Reserve on Wednesday as the central bank said it would continue to hold interest rates at near zero until at least late 2014, well past its previous pledge of mid 2013. The release of the minutes of the Federal Open Market Committee’s December meeting, at about 12:30, in which it said it anticipates that economic conditions will necessitate keeping its target range for the federal funds rate at 0% to 0.25% for the next three years, immediately sent stock prices higher. Prior to the announcement, stock prices were mostly lower except in the tech sector, which rallied on Apple’s after-hours blowout earnings report on Tuesday. At the close, the Dow Jones Industrial Average was up 0.7%, the S&P 500 rose 0.9%, and the tech-heavy NASDAQ index jumped 1.1%. The NASDAQ 100 index, made up of the 100 biggest NASDAQ stocks, gained 1.3% to reach its highest level since February 2001.
Bonds also got a lift from the Fed release. The Fed press release said the FOMC had “also decided to continue its program to extend the average maturity of its holdings of securities (i.e., Operation Twist) as announced in September.” The Fed said it would continue to reinvest principal payments from its holdings of agency debt and mortgage-backed securities and roll over maturing Treasury securities at auction. Treasury securities were mostly higher after the announcement but retreated as the afternoon wore on. Indeed, the price of the 30-year T-bond was largely unchanged at the close, its yield at 3.15%. The yield on the 10-year note, which ended Wednesday with a half-point price gain, was at an even 2.00%. The yield on the five-year note hit a record low of 0.76% before ending the day at 0.80%. The price of Treasury inflation-indexed securities, or TIPS, soared, with the 30-year security jumping more than two points at one point before ending the day about roughly 1.75 points higher. Inflation expectations ticked higher as the FOMC’s three-ring circus seemed to suggest a willingness at the Fed to accept higher inflation, which the FOMC is now officially targeting at 2%, long the rumored target.
Receiving short shrift in today’s markets was its less optimistic assessment of the U.S. economic outlook. The Fed said it now “expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually … Strains in global financial markets continue to pose significant downside risks to the economic outlook.” The Fed lowered its U.S. growth forecast for this year to between 2.2% and 2.7% from its November projection of 2.5% to 2.9%. Additional details of the Fed’s changing economic expectations are shown in the accompanying table.
European stock markets, which closed before the release of the Fed report, ended mostly lower. The Stoxx Europe 600 index fell 0.4%, while the FTSE 100 index of London-traded stocks lost 0.5% and the CAC 40 French index fell 0.3%. Germany sold 30-year bonds at an average yield of 2.62%, their lowest yield since the introduction of the euro. In secondary market trading, the price of the 30-year bund rose over a point, its yield closing at 2.59%. The euro gained 0.6%, climbing back over $1.31.
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