The major domestic equity indexes moved sharply higher on Wednesday after the Federal Reserve said it would be patient in lifting borrowing costs further this year, reassuring investors worried about a slowing economy.
Along with better expected quarterly results from Apple, the Fed’s comments helped Wall Street reverse two down days triggered by profit warnings from corporate bellwethers that signaled a larger impact from a slowdown in China.
Although the Fed said continuing economic and job growth were still “the most likely outcomes,” it removed language from its December policy statement that risks to the outlook were “roughly balanced” and struck language that projected “some further” rate hikes would be appropriate in 2019.
It also said it could alter the pace of its balance sheet reduction “in light of economic and financial developments”. The Fed’s balance sheet surged following the 2008 financial crisis, and many investors believe its effort to shrink it may stifle economic growth.
In recent months there have been rising concerns regarding the global economy. Companies including Apple, Intel and Caterpillar are feeling pain from the slowing expansion of China’s economy, which has been hurt by a trade conflict with the United States.
Apple shares gained 6.83 percent after the company reported a sharp growth in services business, easing concerns after the iPhone maker earlier this month cut current-quarter sales forecast.
Boeing gained 6.25 percent after forecasting full-year earnings and cash flow above consensus estimates amid a boom in air travel and speedier 737 production.
The Street was also keeping a careful eye on the latest round of talks between Washington and Beijing that began on Wednesday.
The Philadelphia Semiconductor index rose 2.87 percent, while the S&P technology index was up 3.03 percent.
Approximately 7.9 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.7 billion share average over the last 20 trading days.
Interest Rates Unchanged
The Federal Reserve kept interest rates at their current levels on Wednesday, with its overnight benchmark lending rate in a target range of 2.25 percent to 2.50 percent. It also indicated that it would be patient with regard to raising rates going forward due in large part to rising uncertainty as to the country’s economic outlook.
While the Fed said continued economic and job growth were still “the most likely outcomes,” it removed language from its December policy statement that risks to the outlook were “roughly balanced” and struck language that projected “some further” rate hikes would be appropriate in 2019.
In a separate release from its policy statement, the Fed also said while it was continuing its monthly balance sheet reduction, it was prepared to alter the pace “in light of economic and financial developments” in the future.
The Fed said in that same document that it had decided to continue managing policy with a system of “ample” reserves, a signal that its balance sheet rundown may end sooner than expected.
Taken together, the two documents were meant to convey maximum flexibility from a central bank buffeted in recent weeks by financial market volatility and signs of a global economic slowdown.
“In light of global economic and financial developments and muted inflation pressures, the committee will be patient” in determining future rate hikes, the Fed’s rate-setting committee said in its policy statement after a two-day meeting.
The Fed made no change to the $50 billion monthly runoff of Treasury bonds and mortgage-backed securities from its balance sheet. Some traders have urged it to slow or halt its pullback from the bond markets, at least for now.
The economic outlook, however, has become more clouded as a result of recent volatility in financial markets and signs that growth is slowing overseas, including in China and the euro zone. There are also fears the 35-day partial shutdown of the U.S. government may crimp consumer spending.
The slight downgrade in the Fed’s language around rate increases included a change in its description of economic growth from “strong” to “solid,” and it noted that market-based measures of inflation compensation have “moved lower in recent months.”
The policy decision met with a unanimous vote.
Other Economic News
Private payrolls increased solidly in January, pointing to sustained labor market strength despite a recent easing in consumer and business confidence that has suggested a loss of momentum in the economy.
The strong hiring shown in the ADP National Employment Report on Wednesday also suggested there had been minimal impact on the labor market from the just-ended 35-day partial shutdown of the federal government.
Other data showed contracts to buy existing homes tumbled to a more than 4-1/2-year low in December.
The ADP National Employment Report indicated that private payrolls increased by 213,000 in January after rising by 263,000 in December. Economists polled by Reuters had forecast private payrolls advancing 178,000 in January.
The ADP report, which is jointly developed with Moody’s Analytics, was published ahead of the government’s more comprehensive employment report for December scheduled for release on Friday.
While the ADP report is not considered a reliable predictor of the private payrolls portion of the government’s employment report because of differences in methodology, it was in line with other market data, including weekly filings for unemployment benefits, that have suggested a healthy jobs market.
According to one survey by Reuters, nonfarm payrolls likely increased by 165,000 jobs in January after jumping 312,000 in December. The unemployment rate is forecast unchanged at 3.9 percent.
In a separate report on Wednesday, the National Association of Realtors said its pending home sales index, based on contracts signed last month, fell 2.2 percent to 99.0, making it the weakest reading since April 2014.
Contracts to purchase homes have now declined for three straight months. Pending home sales become sales after a month or two, and last month’s drop suggested further weakness in existing home sales after they hit a three-year low in December.
The consensus was for pending home sales to rise 0.5 percent. Pending home sales fell 9.8 percent from a year ago, the 12th straight month of annual decreases. Contracts fell in the South, Northeast and Midwest. They rose in the West.
The weak housing report added to surveys showing a plunge in consumer confidence in January and some regional Fed manufacturing surveys that have suggested a slowdown in economic activity in the fourth quarter and early in 2019.
It is likely that. economic growth has fallen off somewhat in the fourth quarter from the July-September period’s brisk 3.4 percent annualized rate.
The advance fourth-quarter GDP report, which was scheduled for release on Wednesday, has been delayed as the government shutdown prevented the collection of source data by the Commerce Department’s Bureau of Economic Analysis and Census Bureau.
Despite the weakness in signed contracts and sales, the outlook for the housing market is improving amid a moderation in house price inflation.
The slowdown in house prices comes at a time when the 30-year fixed mortgage rate is hovering at a nine-month low of 4.45 percent, according to mortgage finance agency Freddie Mac. This, together with improving supply, could help to support the housing market this year after it struggled in 2018.