Stocks add to gains as Fed holds rates low
Sara Lepro And Tim ParadisInvestors sent stocks higher Wednesday after comments from the Federal Reserve and reports on service industries and employment raised hopes about the economic recovery. The market gave up some of its gains after the House voted to speed up the effective date of limits on credit card companies.
The Fed, as expected, left its benchmark interest rate unchanged at a record low of essentially zero and said the economy is slowly rebounding. The decision followed reports on service industries and employment eased two of the biggest worries about the economy.
The Fed's statement accompanying its rate decision noted that housing activity has picked up in recent months. It also said consumer spending, while still constrained by unemployment and other problems, appears to be growing.
Policymakers said they would keep interest rates low for an "extended period" and said inflation is likely to remain tame. That eased some worries that rising prices would force the Fed to boost interest rates and risk cutting off a nascent recovery in the economy.
"It's definitely dovish. We think it supports continued market progress over the next few months," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.
Meanwhile, the House approved new rules for credit card companies unless lenders agree to freeze interest rates and fees. The vote would move up the February effective date of legislation already passed by Congress that limits what banks can charge for credit cards.
It didn't appear likely that the Senate would also pass the measure, but the House vote still unnerved the market.
Investors have grown fearful that the economic rebound they've been betting on over the past eight months will be fleeting, considering that job losses remain high and consumers still aren't spending freely. Stocks have zigzagged over the past few weeks amid the heightened uncertainty.
The day's economic reports bolstered hopes that consumers could increase consumer spending, a critical factor for an economic recovery.
The Institute for Supply Management said service industry activity grew for a second straight month in October. The trade group's service index slipped to 50.6 from 50.9 in September. A reading above 50 signals growth.
The index didn't meet forecasts but the ISM said new orders, which are an indicator of future business activity, grew faster. Business activity also picked up.
Encouraging news about the labor market also boosted investors' mood. The ADP National Employment Report said 203,000 private sector jobs were lost in October, down from the 227,000 lost in September. It was the seventh straight month of declining job losses. That stirred hopes for a better-than-expected employment report from the Labor Department on Friday.
In late afternoon trading, the Dow rose 73.38, or 0.8 percent, to 9,845.29. It had been up as much as 156 after the Fed announcement.
The broader Standard & Poor's 500 index rose 5.77, or 0.6 percent, to 1,051.18, and the Nasdaq composite index rose 5.90, or 0.3 percent, to 2,063.22.
Two stocks rose for every one that fell on the New York Stock Exchange, where volume came to 956.8 million shares, compared with 987.7 million at the same point Tuesday.
Stocks ended mostly higher Tuesday, after swinging between gains and losses.
The Fed said it would curb purchases of debt from Fannie Mae and Freddie Mac to $175 billion, from $200 billion, because the supply of that debt has declined.
Anthony Chan, chief economist at JPMorgan Private Wealth Management, said the Fed tried to downplay the decision to buy less debt from Fannie Mae and Freddie Mac. He said, however, that the move also has the effect of reducing money in the financial system.
"I think it is a signal that they are acknowledging that economic activity is picking up, but they still don't feel comfortable enough bringing in the marching band to acknowledge it," Chan said.
Gains in several big stocks pulled the Dow industrials higher.
Walt Disney rose after China's planning agency signed off on plans for a Disney theme park in Shanghai. The stock advanced 76 cents, or 2.8 percent, to $28.38.
Microsoft Corp. rose 81 cents, or 2.9 percent, to $28.37 after saying it would cut 800 jobs in addition to the 5,000 layoffs it announced in January.
Cisco Systems Inc. rose 49 cents, or 2.1 percent, to $23.40 ahead of the computing networking company's fiscal first-quarter earnings report, which is due after the closing bell.
In other trading, bond prices were mixed. The benchmark 10-year Treasury note fell, pushing its yield up to 3.54 percent from 3.47 percent late Tuesday.
The dollar fell against other major currencies, helping to send commodities prices higher.
Gold rose as high as $1,096.50 an ounce. Crude oil added $1.02 to $80.62 a barrel on the New York Mercantile Exchange as the government said U.S. crude supplies fell more than expected.
Britain's FTSE 100 rose 1.4 percent, Germany's DAX index gained 1.7 percent, and France's CAC-40 jumped 2.4 percent. Japan's Nikkei stock average rose 0.4 percent.