If you look at the Dow’s performance today, something moved the market in a big way right around 2:00 PM EST. The benchmark index started to lose steam in mid-afternoon, only to shoot higher suddenly. 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 low interest rate policy. And this month, the Fed kept the federal funds rate unchanged at between 0.25% and 0.50%.
As I’ve written before, the current low interest rate policy draws fixed income investors to the stock market. And because rates here are still higher than other major markets around the world, foreign capital continues to flow into the U.S. markets.
The Fed made the smart move, in my opinion. While the economy may be experiencing “modest” growth, in the Fed’s words, there are still some trouble spots. Just last week, I wrote about the poor August retail sales report, minimal inflation and slowing industrial production. And a few weeks ago we had the disappointing August payroll report and the abysmal ISM manufacturing index.
Now, the Fed did leave the door open for a December rate increase. As a labor economist, Janet Yellen undoubtedly wants to see further improvement in the jobs market. The Fed is also, monitoring inflation; if inflation reaches a 2% annual rate, the Fed will be more likely to raise rates in December.
Nonetheless, the Fed reiterated that any rate increases would be gradual. Even the more hawkish members on the board only wanted to raise rates to a range of 0.5% to 0.75%. With this being a Presidential election year, there is still plenty of pressure on the Fed to remain accommodative.
For now, there are no complaints from Wall Street. Immediately following the announcement, the benchmark indices shot higher.