U.S. Stocks Rise After Fed Minutes Show Caution on Rate Path

  • FOMC meeting minutes show close call, wait for additional data
  • S&P 500 fell most in four weeks Tuesday amid earnings angst

FOMC Minutes Reveal a Much More Divided Fed

U.S. stocks extended gains after minutes from the Federal Reserve’s latest meeting showed officials were in no rush to raise interest rates as they wait for additional data on the strength of the labor market.

The S&P 500 Index rose 0.3 percent to 2,143.69 at 2:22 p.m. in New York, near its average price during the past 100 days after the steepest selloff in four weeks took it below that closely watched level for the first time since June. The index extended gains following the Fed release as officials were seen debating the timing for higher rates amid data showing steady but slow improvement in the economy.

“It was a little bit more balanced in the sense of more talking around the possibility of raising the rates,” said Melda Mergen, senior vice president and director of U.S. equities in Boston at Columbia Threadneedle Investments. “That being said, it’s pretty much offset with the factors like looking at the downside risk outside the U.S. and maybe the other things in the economy can give them a pause here.”

Uncertainties over the economic outlook and the desire by the committee to assure that job growth remains strong are likely to delay another rate increase until December, federal funds futures traders are betting. Fed officials next meet Nov. 1-2, just before the U.S. election on Nov. 8.

At the September meeting, the Federal Open Market Committee left the benchmark lending rate unchanged, even as a majority of the 17 participants still forecast at least one hike this year. Officials debating the merits of raising interest rates last month described the decision as a close call, with several saying a rate hike was needed “relatively soon,” minutes of the September meeting showed.

Equity investors are on edge after Alcoa Inc. yesterday dropped the most in seven years following results that missed analysts’ estimates. The release came as projections called for a sixth quarter of falling earnings for the S&P 500, while speculation intensified that the Fed will raise borrowing costs this year. The benchmark U.S. 10-year note yield rose to a four-month high Wednesday, while traders place the odds of a move in December at 67 percent, up from 50 percent two weeks ago.

“The combination of bad out-the-gate earnings reports, rising sense of Fed raising rates, and bond yields going up is a tough combination for stocks,” said Jim Paulsen, chief investment strategist at Wells Capital Management, which manages about $350 billion. “The market is going to need a show of momentum economically and on earnings to handle higher yields.”

Recent economic data beating forecasts and comments by Fed officials have fueled bets that the central bank is on a path to increase rates this year. Investors will watch reports on retail sales, consumer sentiment and producer prices due on Friday.

“Some investors are a bit nervous,” said Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland. “Hiking once is fine, but a series of increases could hurt the market. While good for banking, it means higher financing costs, which means lower profits for firms.”

Railroad CSX Corp. will release earnings after Wednesday’s market close, while Delta Air Lines Inc., JPMorgan Chase & Co. and Citigroup Inc. are also among those scheduled to report this week. Analysts forecast a profit drop of 1.6 percent for S&P 500 companies in the third quarter.

“The trend coming out of the industrials companies that reported is very weak, but we’re not seeing any indication that that’s bleeding outside of industrials,” said John Augustine, chief investment officer for Huntington Bank in Columbus, Ohio, which oversees more than $17 billion. “There’s still the potential for a 2 to 3 percent upside surprise overall to earnings estimates and that will end the profits recession.”

After surging as much as 7.2 percent this year through a record in August, the S&P 500 has failed to push higher. On Tuesday, the gauge closed at an almost one-month low, while the CBOE Volatility Index surged 15 percent. The measure of expected stock-price swings added 3.3 percent on Wednesday.

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