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 footing, staying firmly in the red through mid-afternoon when something clearly excited investors. In the span of a few hours, the Dow surged 200 points higher from its intraday low. 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 that an interest rate hike would be "unlikely at the April FOMC meeting." That’s Fedspeak for "we’re not touching interest rates until we see 2% inflation."
Given that consumer prices have fallen for three straight months (according to the January CPI report), this makes sense. Over the past 12 months, core consumer prices (a key measure of inflation) have risen just 1.6%, well below the Fed’s 2% inflation target. In this deflationary environment the Fed is under pressure to keep rates low; if the Fed were to raise rates prematurely, the dollar would surge higher, causing instability in the global finacial markets.
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 rally. Beyond breaking the market’s latest losing streak, this announcement is also bullish for the market in the long run.