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 solid footing, trending modestly higher through mid-afternoon when something clearly excited investors. The Dow ended up finishing the day nearly 300 points higher. What happened to cause such a commotion on Wall Street?
Well, this afternoon the Federal Open Market Committee (FOMC) released a statement regarding the central bank’s policy decisions. Wall Street got the news that it wanted, which was the Fed is going to "be patient in beginning to normalize the stance of monetary policy." That’s Fedspeak for "interest rates are going to remain near zero for the foreseeable future."
Given that consumer prices just posted their largest drop in six years (according to the November CPI report), this makes sense. Over the past 12 months, core consumer prices (a key measure of inflation) have risen just 1.7%, well below the Fed’s 2% inflation target. In this deflationary environment the Fed has wiggle room to keep rates low, and by extension, investors happy.
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 finish the day considerably higher. Beyond breaking the market’s multi-day losing streak, this announcement is also bullish for the market in the long run.