If you look at the Dow’s performance today, something moved the market in a big way right around 2:00 PM EST. The major indices started the trading day on a shaky foot, trending lower through mid-afternoon when something clearly excited investors. What happened to cause such a commotion on Wall Street?
Well, this afternoon the Federal Open Market Committee (FOMC) unveiled its latest policy decision regarding its ongoing bond purchasing program, known officially as Quantitative Easing. As expected, the FOMC reduced its monthly asset purchases by $10 billion to $35 billion. Over the past several months the Fed has incrementally tapered by $10 billion each month, so this is pretty much standard practice by now.
Notably, the Fed lowered its outlook for the U.S. economy. For 2014 the nation’s central bank now anticipates between 2.1% and 2.3% annual growth. This is a downgrade from its previous forecast of 3% annual growth. The reason for the revision is obvious: The brutal winter season brought the economy to a standstill and it has only recently begun to heat up. For 2015 the Fed still expects between 3% and 3.5% growth.
Of course, the markets barely batted an eye at the lowered forecast. Wall Street got the news that it wanted, which was the Fed still plans to keep interest rates near zero for a “considerable period,” even after it has stopped purchasing bonds. We won’t likely see a rate hike until the middle of 2015 at the earliest.
As I’ve explained in previous blog posts, the accommodative Fed policy is a boon for the stock market. The ultra-low interest rates allow corporations to borrow very cheaply on the bond market and then use those proceeds to buy back their stock. And when companies buy back their stock this boosts earnings per share and oftentimes share prices.
So it is clear that the Fed’s latest announcement is what caused the benchmark indices to turn around and finish the day considerably higher. Beyond causing the S&P 500 to close at a record high, this announcement is also bullish for the market in the long run.