Thursday saw the S&P 500 and Nasdaq indexes close slightly lower after the Fed’s post meeting statement. Energy stocks were the largest drag on the S&P due to lower prices for domestic crude.
The Fed said after its two-day meeting that strong job gains and household spending were keeping the economy on track but business investment “moderated from its rapid pace earlier in the year,” creating a possible drag on future economic growth.
Aside from the comment about business investments, the Fed statement was largely as expected and suggested to investors that the Fed’s next rate hike would be in December. However, there was a degree of hope for a change in tone after October’s market sell-off.
The three indexes were up 2 percent in the previous day’s trading session due to a relief rally given that the elections were in the rearview mirror.
The S&P bank index ended the day with a 0.4 percent gain as Treasury yields rose as bank profits benefit from rising rates.
Energy stocks were the S&P’s largest drag with a 2.2 percent drop as domestic crude oil futures confirmed a bear market, falling more than 20 percent from their Oct. 3 high a rising global supply of crude, which is increasing more quickly than many had expected.
The Wall Street Journal reported that Saudi Arabia’s top government-funded think-tank is studying the possible effects on oil markets of a breakup of OPEC in a story citing unnamed people familiar with the matter.
Approximately 7.23 billion shares changed hands on the major domestic equity exchanges, as compared to the 8.43 billion share average over the past 20 trading sessions.
Jobless Claims Fall Again
New unemployment insurance claims were down a bit last week and the number of people receiving benefits remained at a 45-year low as strong labor market conditions continued.
According to a report released by the Labor Department on Thursday morning, initial claims fell by 1,000 claims to a seasonally adjusted 214,000 claims for the week ended November 3.
Data for the prior week was revised to show 215,000 claims received, which was 1,000 more than previously reported.
The Labor Department said claims for North Carolina continued to be affected by Hurricane Florence, while Hurricane Michael impacted those for Florida and Georgia. Claims data for Massachusetts was estimated.
The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell to 213,750 claims in the latest week, a decline of 250 from the prior week’s upwardly revised reading of 214,000 claims.
Thursday’s claims report also showed the number of people receiving benefits after an initial week of aid fell 8,000 to 1.62 million for the week ended Oct. 27, the lowest level since July 28, 1973. The four-week moving average of continuing claims fell by 7,500 to 1.63 million claims, the lowest level since Aug. 11, 1973.
Ongoing strong job growth has led to a 3.7 percent unemployment rate, the lowest since the 1960s and a level below Federal Reserve policymakers’ current median estimate of “full employment.”
Economy Strong Says Fed
The Fed held interest rates steady on Thursday but remained on track to keep gradually tightening borrowing costs, as it pointed to a healthy economy that was marred only by a dip in the growth of business investment.
Business investment can be a key to rising productivity and future growth, and the fact that it had “moderated from its rapid pace,” as the Fed said, was the only cautionary note in a policy statement that touted strong job gains and household spending, and a “strong rate” of overall economic activity.
“The labor market has continued to strengthen and … economic activity has been rising at a strong rate,” the Fed said, leaving intact its plans to continue raising rates at a gradual pace. The Fed has hiked rates three times this year and is widely expected to do so again in December.
The statement overall reflected little change in the Fed’s outlook for the economy since its last policy meeting in September. Inflation remained near its 2 percent target, unemployment fell, and risks to the economic outlook were still felt to be “roughly balanced.”
Policymakers, however, took particular note of the moderation in business investment, an important component of GDP that can spin off jobs as companies build new facilities, and raise productivity as they upgrade equipment and processes.
Raising investment was one of the main objectives behind the Trump administration’s move to reduce the corporate tax rate as part of its restructuring of the tax code at the end of 2017.
After adding four-tenths of a percentage point to economic growth in the first six months of the year, lagging investment in “nonresidential structures” trimmed a quarter of a percentage point in the annualized growth rate for the third quarter.
Financial markets, which had expected the Fed to hold its benchmark overnight lending rate steady in the current range of 2.00 percent to 2.25 percent this week, ticked lower after the statement was released.
After a stock market rout in October and signs that both housing and business investment may be waning, there was some question as to whether the Fed might possibly signal doubt about its next rate increase. Yet December still seems firmly in play.
The Fed’s statement offered no indication the central bank might slow the pace of its rate increases.
Data released in late October showed the economy grew at a 3.5 percent annual rate in the third quarter, well above the roughly 2 percent annual growth pace the Fed and many economists regard as the underlying trend.
However, Fed policymakers also have begun debating whether the economy has reached a plateau as the stimulus from the Trump administration’s $1.5 trillion tax cut package and increased federal spending begin to fade.
The Fed’s policy statement did not explicitly take stock of the recent volatility in the equity markets that led to the selloff in October or address the possibility of a slowdown in global growth next year.
There were no updated economic forecasts released on Thursday and Fed Chairman Jerome Powell was not scheduled to hold a news conference. The Fed’s policy decision was unanimous.