The market was happy with the Federal Reserve’s decision to keep rates unchanged on Wednesday.
While the Fed presumably does not make decisions based on market reactions, it seems that in addition to waiting for more positive momentum, its decision to hold rates unchanged in September could also be a sign that it will be transparent in future Fed policy changes.
A 25 basis point change shouldn’t affect the market that much. Yet after Fed officials said in August at Jackson Hole, Wyoming, that it could potentially raise rates twice this year, stocks fell significantly with the Standard & Poor's 500 down 0.16% and the Dow Jones Industrial Average down 0.28% on Aug. 26. Stocks were also down for the month of August with the S&P 500 down 0.12% and the Dow Jones Industrial Average down 0.17%. It seems that the Fed’s aggressive comments could have been testing the market for help in the overall decision on when to make the next increase.
The market was much happier with no rate increase Wednesday. The S&P 500 gained 1.09% led by energy stocks. The Dow Jones Industrial Average gained 0.90% led by Boeing (BA, Financial) and Caterpillar (CAT, Financial) with a gain of 2.17%. The Nasdaq Composite also reached a new high, gaining 1.02% to close at 5,332.05.
Overall, while the Fed predicted four rate increases for 2016 last year, it has yet to increase at all, and that appears to be a good thing for the market right now.
With only one live meeting left in 2016 that includes a press conference, many believe the Fed will make its 25 basis point increase to the federal funds rate in December. Wednesday’s comments showed the Fed would like to see more positive economic momentum signaling it is less fragile than the data has been showing in recent weeks.
In the Fed’s projections, it lowered estimates for its leading indicators which supported its decision to wait for more positive economic momentum.
It seems a rate increase will occur in November or December with 14 of 17 voting members indicating a rate increase is appropriate in 2016.
A CNBC report Wednesday provided further detail and insight on the Federal Reserve’s FOMC meeting.
Disclosure: I do not own any stocks included in this article.
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