If you look at the Dow’s performance today, something moved the market right around 2:00 PM EST. The benchmark index started the morning strong, only to lose steam by mid-afternoon. Then, right around 2:00 PM, there was a little uptick in the market. What happened to cause this activity 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 0.50% and 0.75%.
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 near-term risks. Last week, existing home sales and new home sales underperformed expectations for December. Durable goods orders also unexpectedly fell in December, which was a disappointment. And the latest retail sales data have been, in a word, abysmal.
Now, the Fed is still planning three interest rate hikes for 2017. As a labor economist, Janet Yellen undoubtedly wants to see further improvement in the jobs market. As a result, I’ll be watching this Friday’s payroll report very closesly.
The Fed is also monitoring inflation; if inflation reaches a 2% annual rate, the Fed will be more likely to raise rates in the coming months. Nonetheless, the Fed reiterated that any rate increases would be gradual.
For now, there are no complaints from Wall Street. Immediately following the announcement, the benchmark indices held steady.