Stocks Finish Higher after Fed Decision

Policymakers left rates unchanged and said that the pace of U.S. economic contraction appears to be slower

U.S. stocks finished solidly higher Wednesday after the Federal Reserve, concluding its two-day policy meeting, held the Fed funds rate steady at 0-0.25% and said that the pace of contraction in the economy "appears to be somewhat slower."

Earlier, stocks got a boost from stronger-than-expected earnings reports from DreamWorks Animation (DWA), Goodyear Tire & Rubber (GT), and other firms, which offset a steeper-than-expected drop in first-quarter GDP.

Investors' worries about the swine flu outbreak in a number of countries appear to have had less impact on trading than earlier this week, says S&P MarketScope.

On Wednesday, the 30-stock Dow Jones industrial average finished higher by 168.78 points, or 2.11%, at 8,205.40. The broader S&P 500 index gained 18.48 points, or 2.16%, to 873.64. The tech-heavy Nasdaq composite index gained 38.13 points, or 2.28%, to finish at 1,716.99.

Treasuries headed lower as stocks rallied. The dollar index fell. Gold futures climbed. Oil futures rose.

Short sellers were apparently getting squeezed in end-of-month portfolio adjusting, according to S&P MarketScope.

In its post-meeting statement, the policy-setting Federal Open Market Committee said that "household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit". Weakness in sales and tight credit conditions have led businesses to cut back on inventories, fixed investment, and staffing, the Fed added.

"Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time," the Fed said.

In light of increasing economic slack in the U.S. and abroad, the central bank expects that inflation will remain subdued. "Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

The Fed reiterated that it will "employ all available tools" to promote economic recovery and to preserve price stability. It anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Fed cited its previously announced intention to purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Fed will buy up to $300 billion of Treasury securities by autumn.

"The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments," the Fed added.

The Fed's decision was unanimous.

"The FOMC didn't surprise with its actions or statements this month," said Action Economics, which noted that.

U.S. gross domestic product (GDP) contracted 6.1% in the first quarter, a third consecutive quarterly decline following the 6.3% drop in the fourth quarter and the 0.5% slip in the third. It's the biggest back-to-back drop in growth since 1957-58, notes Action Economics.

As expected, a record $103.7 billion inventory drawdown chopped off 2.8% from growth, says Action Economics. Gross private fixed investment fell a whopping 51.8%, taking off 8.8% from growth, with declines of over 35% for both residential and nonresidential spending. Government spending declined 3.9%. Personal consumption expenditures actually rebounded 2.2% after a 4.3% decline in the fourth quarter and a 3.8% drop in the third.

The weaker-than-expected GDP figure could increase concerns of a deeper recession, says S&P MarketScope. But apparently some traders are betting the worst is over for the economy.

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