Stocks Fall as Fed Leaves Interest Rates Unchanged
Mood cautious as officials flag concerns about global weakness
U.S. stocks ended mostly lower, as investors welcomed continued easy-money policies but remained cautious as central bank officials noted concerns about global market turmoil.
The Federal Reserve left short-term interest rates unchanged after weeks of market-churning debate at the central bank about whether it was time to end an era of near-zero rates. Many investors remained cautious, however, as central bank officials noted concerns about weakness in global economies and markets.
The Dow Jones Industrial Average fell 0.4%, after gaining as much as 194 points in the wake of Fed announcement. The S&P 500 slipped 0.3% while the Nasdaq Composite edged up 0.1%.
Investors around the world have been closely watching the central bank’s decision on short-term rates, which have been near zero since the financial crisis in a bid to stoke growth and borrowing. That stance has helped propel a six-year-long bull market in stocks and bonds.
Traders signal offers in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange on Thursday morning.
Traders signal offers in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange on
But expectations of a rate increase on Thursday had diminished in recent weeks amid a stumble in global financial markets. Stocks rose this week on anticipation that the Fed would stand firm.
“Much of the reaction was done leading up to it,” said Jim Paulsen, chief investment strategist at Wells Capital Management, which manages $351 billion. “People decided over the last couple of weeks that the Fed wasn’t going to raise rates. So by the time it was announced, for the market it wasn’t hugely different than what was prepared for.”
U.S. government debt prices rose, pushing the yield on the 10-year Treasury note down to 2.215% compared with 2.27% before the Fed’s announcement. It was 2.301% Wednesday.
The dollar tumbled to a three-week low against the euro and slipped against the yen. Higher rates in a country tend to attract investors to that country’s currency, lifting its value relative to other currencies.
Fed officials have been signaling for months they plan to raise rates this year after cutting them to exceptionally low levels in December 2008 in response to the financial crisis.
A large majority of Fed officials still believe the central bank will raise rates before year-end, but the central bank in Thursday’s statement showed a bit less conviction on that point. In June, 15 of 17 officials said they expected to raise rates this year, according to official projections released with the Fed’s policy statement; on Thursday the number of people who expected to raise rates this year slipped to 13.
Many investors now expect the Fed to hold off on raising rates at all until 2016.
Fed-funds futures, used by investors and traders to place bets on central-bank policy, showed bettors see a 25% likelihood of a rate increase for the October 2015 policy meeting, according to data from CME Group. The odds were 37% before the Fed announcement and 50% a month ago.
The odds of a rate increase at the December 2015 meeting were 54%, compared to 62% before the Fed’s decision and 73% a month ago, according to CME.
Some traders worried that the Fed decision reflected officials’ concern about economic weakness.
“They must have seen something out here that’s really scary,” said Floyd Upperman, an independent trader in Laguna Niguel, Calif. Mr. Upperman said he remained cautious even though the ultralow rates that helped fuel a six-year bull run in stocks would continue for at least a couple more months. “The uncertainty is still there.”
Mr. Upperman said he would wait for the dust to settle before trading.
“There’s always the thought: Does the Fed know something we don’t know?” said David O’Malley, chief executive of Penn Mutual Asset Management. Although he said that rock-bottom interest rates are likely to support stocks in the short turn, Mr. O’Malley is betting against stocks because he believes corporate-earnings growth will be tepid.
Still, others said the decision to keep rates at zero bolstered the stock market’s allure. “Stocks are still very attractive relative to the alternatives, relative to holding cash and relative to fixed income,” said Hank Smith, chief investment officer at the Haverford Trust Co., which oversees $8.2 billion.
Many called Thursday’s announcement anticlimactic. John Augustine, chief investment officer of Columbus, Ohio-based Huntington Bank, said there were “groans and mostly just disappointment” in his office following the Fed decision.
“We were all waiting for the start of a new era…and it now looks like that’s pushed back to next year,” he said. Mr. Augustine said the dovish statement “breathes new life” into high-yielding stocks such as utilities and real-estate investment trusts, and that he will likely buy more stocks in those sectors. Utilities took off after the Fed statement and are up 2.3% Thursday, leading the S&P 500 higher.
Earlier, global markets were mostly lower. The Stoxx Europe 600 lost 0.2%. The Shanghai Composite Index oscillated before ending the session down 2.1%, while shares in Japan climbed for a third straight day.