U.S. Stocks Climb, Dollar Drops as Yellen Sees Gradual Rate Rise

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Fed on Track to Raise Rates This Year

U.S. stocks rose, the dollar fell and Treasuries erased losses as the Federal Reserve signaled the pace of monetary-policy tightening will be gradual even as the central bank prepares to raise interest rates this year.

The Standard & Poor’s 500 Index added 0.2 percent at 4 p.m. in New York, reversing declines after the Fed’s statement. The Bloomberg Dollar Spot Index dropped 0.7 percent, wiping out previous gains. Yields on 10-year Treasuries were up one basis point to 2.32 percent after earlier jumping to 2.40 percent. Gold climbed 0.3 percent, while U.S. oil held near $60 a barrel.

The Fed maintained its forecast for the benchmark rate to rise to 0.625 percent this year, while lowering its projection for 2016. Although officials bolstered their assessment of the labor market and economy, Chair Janet Yellen said they want to see more decisive evidence on growth, and that she anticipates only gradual increases in borrowing costs will be warranted. Euro-area finance ministers meet to discuss Greece on Thursday.

“We are sort of in a Goldilocks economy where we don’t have to rush to make any drastic moves,” said Myles Clouston, senior director of Nasdaq Advisory Services in New York. “The Fed has the luxury to take their time and be thoughtful given that the economy is showing signs of improvement on multiple fronts. Things seem to be moving smoothly.”

Officials held the overnight fed funds rate in the zero to 0.25 percent range, where it has been held since December 2008 during the worst financial crisis since the Great Depression. The decision was unanimous. The Fed also cut the top end of its projection for growth in 2015 gross domestic product by 0.7 percentage point to 2 percent.

Supports Risk

Three rounds of Fed bond purchases and borrowing costs near zero have propelled the S&P 500 up by more than 200 percent during the six-year bull market.

“It looks like there’s a shallower rate hike path for 2016 and 2017,” John Canally, chief economic strategist at LPL Financial Corp. in Boston, said by phone. “That should be supportive of risk assets.”

Stock gains have slowed this year, with the S&P 500 up about 2 percent after the Fed ended its unprecedented asset-purchase program in December and signaled a rate increase could occur at any meeting. The U.S. economy contracted in the first quarter, fueling concern that tighter policy may thwart the recovery and dent corporate profits.

The Fed met as data continued to show uneven gains in the economy. Weaker-than-forecast housing and factory reports this week followed a jump in retail sales and a surge in confidence that indicated American consumer demand is recovering amid persistent gains in the labor market.

Oracle Sinks

Yellen said May 22 that she expects the economy to return to a “moderate” pace of growth, adding that it would be appropriate to raise rates this year should that eventuate. Oil’s recent rally may bolster the Fed’s confidence in inflation tracking toward the central bank’s 2 percent goal.

Oracle Corp. slid about 7 percent in extended U.S. trading after the software company reported lower-than-estimated revenue and profit, pinning the blame on currency fluctuations and sagging sales of new products. In normal trading hours, eight of 10 S&P 500 industry groups advanced, led by utilities and consumer-staples stocks.

The greenback retreated against 12 of its 16 major peers, with the euro jumping 0.8 percent and the British pound gaining 1.2 percent. The yen was little changed for a third day, slipping less than 0.1 percent to 123.43 per dollar Wednesday. Brazil’s real and the Turkish lira led gains among emerging-market currencies.

Greek Factor

The pace of U.S. rate increases may also depend on the outcome of Greece’s months long debt negotiations. The country needs to seal a deal before the euro area’s bailout package expires June 30, or risk missing repayments that could lead to its expulsion from the euro.

Officials from the Netherlands, Portugal and Germany said they were bracing for a breakdown in talks that could roil the currency bloc. Greek Prime Minister Alexis Tsipras said he’s ready to assume responsibility for the consequences of rejecting an unfair deal with creditors.

In European trading Wednesday, Spain’s 10-year bonds rose for a second day relative to Germany’s, which are perceived to be the safest in the euro region. The divergence indicated investors may be betting the risk of contagion from Greece’s crisis will be limited.

The Stoxx Europe 600 Index slid 0.5 percent at the close of trading, paring an earlier drop of as much as 0.8 percent. Greece’s ASE Index fell 3.2 percent to its lowest close since September 2012.

Bear Market

The MSCI Emerging Markets Index climbed 0.4 percent from an 11-week low after the Fed statement. A Bloomberg gauge tracking 20 developing-nation currencies jumped for a second day.

Oil fluctuated after government data showed that U.S. refineries unexpectedly reduced operating rates while stockpiles of crude at the nation’s largest hub rose last week. West Texas Intermediate crude closed down 0.1 percent at $59.92 a barrel, erasing an earlier gain of as much as 2.4 percent. Brent crude increased 0.3 percent to $63.87.

Gold for immediate delivery rose to $1,185.55 an ounce, rallying amid the Fed’s message that the pace of tightening will likely be gradual. Higher rates drive investors to favor assets that pay interest, including new bonds, curbing the appeal of gold, which generally offers returns only through price gains.

Palladium fell for a fifth day, entering the common definition of a bear market as concerns over supply eased amid signs of a recovery in mine output. Nickel rose for the first time in five days, adding 0.2 percent in London to $12,750 a dry metric ton.

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