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 spooked investors. In a matter of minutes, the gains from the day were nearly wiped out. But in a matter of minutes the market rebounded and surged higher. 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. We had known from earlier reports that the FOMC reduced its monthly asset purchases by $10 billion to $25 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.
The big news is that the Fed is assuring financial markets that interest rates will remain ultra-low for "a considerable time," even after QE ends next month. For the past several years the Fed has kept interest rates near zero, and investors are preoccupied with when rates will finally rise again.
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.
Last month the Fed had given mixed signals about whether they will increase rates sooner than later, but the central bank has appeared to have changed its mind. I believe this is due to recent events across the pond. The European Central Bank (ECB) surprised Wall Street at the beginning of September by cutting rates further. The ECB’s actions appear to be a desperate attempt to fight the deflation that is spreading throughout the euro zone. This is important because the ECB’s actions and ultra-low rates should continue to push down interest rates in other countries.
As for the Fed itself, look for the 0% interest rate policy to persist well into 2015. This is great news for stocks so it puts me in a buying mood.