US stocks wobble after Fed keeps rates flat but end higher on the day

Market barely flinches as Fed says one more rate increase in 2017 on track

PUBLISHED : Thursday, 21 September, 2017, 7:47am
UPDATED : Thursday, 21 September, 2017, 7:47am

US stock indexes overcame an afternoon wobble to close mostly higher on Wednesday after the Federal Reserve said it would start reducing its huge bond portfolio next month and was still on track to raise interest rates later this year.

The central bank’s announcement drove bond yields higher, lifting shares in banks and other financial companies. Banks benefit from higher bond yields because it means they can charge higher interest rates on loans.

High-dividend stocks like utilities and household goods makers fell. Income-seeking investors find those stocks less appealing when bond yields move higher.

“The announcement was pretty much in line with what was expected,” said David Chalupnik, head of equities at Nuveen Asset Management. “So far, the market is taking it in stride, but I don’t know if it should. This will slowly impact growth.”

US Federal Reserve keeps rates flat but hints at one more increase by year’s end

The S&P 500 index inched up 1.59 points, or 0.1 per cent, to 2,508.24. The Dow Jones Industrial Average rose 41.79 points, or 0.2 per cent, to 22,412.59. The modest gains nudged both indexes to record highs, extending a run of milestones that stretches back to last week.

The Nasdaq composite lost 5.28 points, or 0.1 per cent, to 6,456.04. The Russell 2000 index of smaller-company stocks added 5.02 points, or 0.4 per cent, to 1,445.42.

Markets elsewhere were mixed on Wednesday.

In Europe, Germany’s DAX rose 0.1 per cent, while the CAC 40 in France added 0.1 per cent. The FTSE 100 index of leading British shares was flat. In Asia, Japan’s Nikkei 225 added 0.1 per cent and South Korea’s Kospi slipped 0.2 per cent. Hong Kong’s Hang Seng Index added 0.4 per cent. Australia’s S&P/ASX 200 fell 0.1 per cent.

Trading on Wall Street had been mostly subdued this week ahead of the Fed’s announcement.

Fed policymakers decided to leave the central bank’s short-term benchmark interest rate between 1 per cent and 1.25 per cent, but also said they still expect to increase the rate one more time this year and three times in 2018, if persistently low inflation rebounds.

The Fed has modestly raised the rate four times since December 2015 after keeping it at a record low for seven years after the 2008 financial crisis.

In addition, the Fed said it will begin to gradually unwind its more than US$4 trillion balance sheet next month. The portfolio primarily consists of government and mortgage-backed bonds. The move will gradually increase long-term borrowing rates.

The prospect of another Fed rate hike this year at a time when the US economy is growing modestly and may slow somewhat from the impact of hurricanes Harvey and Irma, could be bad news for stocks the next few weeks, Chalupnik said.

“At least over the near term, probably between now and the end of October, the market is at risk,” he said. “And it’s at risk because of lower economic numbers, higher interest rates and earnings that, on an individual-company basis, could disappoint if they were impacted by hurricanes Harvey and Irma.”

Following the announcement, bond prices slumped, sending the yield on the 10-year Treasury note to 2.27 per cent from 2.25 per cent late on Tuesday.

Investors also bid up shares in banks and other financial companies, which led the gainers.

The Fed statement also sent the dollar higher against other currencies. The dollar rose to 112.38 yen from 111.50 yen on Tuesday. The euro weakened to US$1.1885 from US$1.1997.

Technology companies were among the biggest decliners.

Investors also weighed new data on the US housing market that showed sales of previously occupied homes fell 1.7 per cent in August. Over the past 12 months, US home sales have risen only 0.2 per cent. The report from the National Association of Realtors pulled down home builder shares.

Energy companies rose along with the price of crude oil.

Benchmark US crude added 93 cents, or 1.9 per cent, to settle at US$50.41 a barrel on the New York Mercantile Exchange. Brent crude, used to price international oils, gained US$1.15, or 2.1 per cent, to $56.29 a barrel in London.

Among metals, gold gained US$5.80 to US$1,316.40 an ounce. Silver rose 6 cents to US$17.33 an ounce. Copper held steady at US$2.97 a pound.