U.S. stocks rallied with Treasuries, while the dollar tumbled after the Federal Reserve said data suggest economic growth has moderated and officials indicated interest rates will rise at a slower pace than previously estimated. Crude oil rebounded and gold jumped.
The Standard & Poor’s 500 Index surged 1.2 percent to a two-week high by 4 p.m. in New York, erasing an earlier drop of 0.6 percent. The Russell 2000 Index of small-cap companies jumped to a record, while the Nasdaq Composite Index briefly breached 5,000 points. Two-year Treasury yields slid the most in six years and 10-year rates tumbled 13 basis points. The Bloomberg Dollar Spot Index sank the most since 2009. U.S. oil snapped its longest slump since July, adding 2.8 percent to $44.66 a barrel, while gold advanced the most since January.
Stocks jumped as investors viewed the Fed statement as doing little to speed up the schedule for raising U.S. interest rates. Officials said they’d wait for confidence that economic growth is pushing up prices while at the same time noting that expansion has moderated. Fed officials also lowered their estimate for where the federal funds rate will be by end-2015 to 0.625 percent, versus a December forecast of 1.125 percent.
“There’s not enough time between now and June to say inflation expectations have bottomed out, which probably pushes you out to September,” John Canally, chief economic strategist at LPL Financial Corp., which oversees $475.1 billion, said by phone. “The statement about the economy softening a bit raises the market’s awareness that the economy is under-performing where the Fed wants it to be, which pushes them out.”
The central bank said a rate rise in April is unlikely and it won’t tighten policy until it is “reasonably confident” inflation will return to its target and the labor market improves further.
Fed-funds futures trading showed a 40 percent chance the central bank will raise its benchmark rate to at least 0.5 percent by September, according to data compiled by Bloomberg. Prior to Wednesday’s policy statement, the odds were 54 percent.
While the Fed dropped an assurance that it will be “patient” in raising interest rates, Chair Janet Yellen said it doesn’t mean the central bank will be impatient. She also said the central bank is likely to remain “highly accommodative” even after its first rate hike.
“What was unexpected is that their expectations for growth in the economy came down, as did their expectation for inflation,” Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at Stifel Nicolaus & Co. in Florham Park, New Jersey, said by phone. “Consequently, even though they removed the patient language, they’re also telling the market through these reduced expectations that the path for interest-rates increases is going to be relatively shallow.”
Yellen is preparing for an exit from the most aggressive easing in the Fed’s 100-year history. The central bank is trying to reconcile a strong labor market with falling inflation as it moves closer to lifting borrowing costs this year.
The S&P 500 has more than tripled since its bear-market low in March 2009, propelled higher by unprecedented central-bank monetary stimulus and a rise in corporate profits.
“An increase in the target range for the federal funds rate remains unlikely at the April” meeting, the Federal Open Market Committee said in a statement Wednesday in Washington. The panel said it will be appropriate to tighten “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Officials added the phrase “patient” in their December statement, removing a reference to “considerable time” in describing how the central bank plans to normalize its monetary stance. Yellen has said the promise to be “patient” means the FOMC would probably wait at least two meetings before raising rates.
The Fed must contend with the effects of a higher dollar. The Bloomberg Dollar Spot Index, which measures the U.S. currency against 10 leading peers, had been trading near the highest level in data going back to 2004.
A stronger currency can limit the pace of expansion by making U.S. exports more expensive, and it threatens to further restrain inflation, which has lagged behind the Fed’s goal for 33 straight months.
The dollar index has gained 20 percent in the past year through Tuesday and is up more than 4 percent since the Fed last met on Jan. 28, amid faster growth in the U.S. relative to other economies and expectations for rate increases this year.
The S&P 500 now sits 0.9 percent below its March 2 record after falling as much as 3.6 percent from that level on concern that the stronger dollar will hurt corporate profits. The Nasdaq Composite has jumped 2.7 percent since March 11 to close 1.3 percent below its record from the dot-com era.
All 10 of the main S&P 500 groups advanced at least 0.5 percent on Wednesday, paced by a 2.9 percent jump in energy producers. Transocean Ltd. rallied 8.8 percent and Denbury Resources Inc. surged 7.6 percent.
Oracle Corp. rose 3 percent after boosting its dividend by 25 percent. The software maker reported fiscal third-quarter sales that missed analysts’ estimates, hurt by the strength of the dollar and weak corporate demand for cloud software.
FedEx Corp. dropped 1.4 percent after it became the latest multinational company to say the currency will cut into full-year profit. The operator of the world’s largest cargo airline narrowed its full-year profit forecast.
West Texas Intermediate slid to as low as $42.03 a barrel earlier in the day, after data showed U.S. crude stockpiles climbed to another 30-year high. Brent oil gained more than 4 percent to settle at $55.91 a barrel in London.
Gold for immediate delivery climbed 1.6 percent to $1,167.58 an ounce in New York, its biggest one-day increase since Jan. 30.
Through March 17, gold prices were down almost 3 percent in 2015 on concern that U.S. rates would be increased, cutting the appeal of the metal, which generally offers returns through price gains. The benchmark rate has been near zero since 2008.