Stocks End Higher after Fed Decision

Blue chips rose modestly while the Nasdaq eked out a small gain after Alan Greenspan & Co. left rates unchanged and shifted to a neutral bias

Blue chips posted modest gains while the tech-heavy Nasdaq barely managed to finish in positive territory Tuesday after the Federal Reserve's interest rate meeting. As expected, the Federal Open Market Committee (FOMC) -- the policy-setting arm of the Fed -- announced that it left its key federal funds interest rate unchanged at 1.75% and shifted its policy assessment to neutral from easing.

The Dow Jones industrial average gained 57.50 points, or 0.54%, to 10,635.25, led by strength in Procter & Gamble (PG ). The Nasdaq Composite Index added 3.81 points, or 0.2%, to 1,880.87, as computer-related techs edged higher, but many telecom shares fell. The broader Standard & Poor's 500 Index was up 4.74 points, or 0.41%, to 1,170.29, supported by gains in financial, computer, bank and software stocks.

The major news from the Fed was the change in its assessment on the economy to neutral from cautionary. "The information that has become available since the last meeting of the Committee indicates that the economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace," the FOMC said in a press release. "Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."

The central bank had lowered interest rates 11 times last year to stimulate economic growth and kept rates steady in January with a cautious stance. But as more signs surface that the economy is recovering, economists have been trying to predict when the Fed would start raising interest rates. The Fed's statement Tuesday knocked down the aggressive market forecasts for higher rates and "leaves the door wide open for the next few weeks and few months," says Kim Rupert, senior economist at S&P MMS International. "It doesn't put them in a corner for them to tighten at the May or June meeting."

Before the Fed's announcement today, the markets had been expecting a quarter-point rate hike by June. But now, a rate hike may not come until later in the summer. "Greenspan will drag his feet again like he did in the early-90s," says Rupert, who predicts that the Fed will not raise rates until August even though the economy appears to be expanding rapidly. "It will keep the market on an even keel for the time being."

On the merger front, Hewlett-Packard's (HWP ) board announced that based on a preliminary estimate provided by its proxy solicitor, it believes it has enough shareholder votes to approve the computer maker's $20.8 billion bid to acquire Compaq Computer (CPQ ).

Investors also had plenty of earnings news to focus on. Goldman Sachs (GS ) shares rose after the brokerage reported better-than-expected first quarter earnings per share of $0.98, vs. $1.40 a year ago, despite a 40% revenue decline amid weak capital markets.

Dow component Procter & Gamble jumped after the consumer products giant says it expects third quarter EPS to exceed its prior guidance on strong volume and cost performance.

General Motors (GM ) reiterated its $1.20 first quarter EPS guidance, excluding Hughes and any special charge related to GM's restructuring.

Some sectors suffered from earnings warnings. Airline stocks fell after Delta Airlines (DAL ) says its first quarter loss excluding costs will be as much as $380 million, more than analysts expected.

And the telecom equipment group was hurt by a negative forecast from ONI Systems (ONIS ), which is being acquired by Ciena (CIEN ). ONI Systems says the demand outlook remains very cloudy for the group.

One of the big losers on the Nasdaq was Gemstar-TV Guide (GMST ) after it issued a conservative earnings outlook and announced an unexpected charge in the current quarter. The company also announced that its co-president and co-COO Peter Boylan will resign.

Treasury Market

U.S. Treasuries ended slightly lower in price after the FOMC announcement on interest rates.

In economic news, the U.S. trade deficit widened to $28.5 billion in January, in line with expectations. The December deficit was revised to $24.7 billion from $25.3 billion. Imports surged 3.6%, as expected and another sign of the economic recovery, while exports fell 0.1%, a little weaker than expected. The data did not have much impact on the markets.

On Wednesday before the market opens, S&P MMS expects housing starts to fall 2.9% in February to a 1.63 million unit pace. While the expected drop would provide a partial offset to the surge recorded in January, it would leave new construction activity at a still solid pace. The slowing activity could provide some support for Treasuries, says S&P MMS.

World Markets

European stock markets finished higher. In London, the Financial Times-Stock Exchange 100 index gained 16.20 points, or 0.31%, to 5,316.10, led by gains in BP-Amoco and GlaxoSmithKline. U.K. February consumer inflation rose 2.2%, down from 2.6% in January.

In France, the CAC 40 added 19.12 points, or 0.41%, to 4,644.93. In Germany, the DAX Index gained 24 points, or 0.4%, to 5,450 led by Deutsche Bank, DaimlerChrysler, SAP, Allianz and Infineon.

In Asia, the markets ended mixed. In Japan, the Nikkei surged 294.44 points, or 2.56%, to close at 11,792.82, led by electronics shares such as Hitachi and Sony on hopes for an economic recovery in the U.S. and expectations for the sector reorganization to revive their competitiveness. In Hong Kong, the Hang Seng fell 7.81 points, or 0.07%, to end at 11,222.83.

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