U.S. stocks closed sharply higher Wednesday after the Federal Reserve announced that as expected, it was maintaining its 0% to 0.25% target range on the benchmark Fed funds rate. The central bank also reiterated that it will use "all available tools to promote the resumption of sustainable economic growth and to preserve price stability." Among them: the possible purchase of longer-term Treasuries.
The vow from the Fed followed reports that the Obama administration is nearing a deal to let banks remove soured assets from their books. And it preceded a House vote on President Obama's $825 billion economic stimulus plan.
Major indexes were able to log a fourth straight winning session Wednesday. The 30-stock Dow Jones industrial average finished higher by 200.72 points, or 2.46%, at 8,375.45. The broad S&P 500 index was 28.38 points, or 3.36%, higher at 874.09. And the tech-heavy Nasdaq composite rose 53.44 points, or 3.55%, to 1,558.34.
Treasuries fell in price, with the yield on the 10-year note rising to 2.65%. The bond market had been hoping for some direct Treasury purchases to be signaled, though the Fed's statement stopped shy of that for the moment, says Action Economics. The dollar index rose. Gold fell. Crude oil climbed.
In the Fed's statement released at the conclusion of its two-day policy meeting, policymakers said that the Fed "continues to expect that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
The Fed said that information received since the the December FOMC meeting suggests that the economy has weakened further. The Fed said that as consumers and businesses have cut back spending, industrial production, housing starts, and employment have continued to decline steeply. It added that global demand appears to be slowing significantly.
"Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight," said the central bank. The Fed anticipates that a gradual recovery in economic activity will begin later this year, but "the downside risks to that outlook are significant."
"The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level," said the Fed. The central bank continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and said it stands ready to expand the quantity of such purchases and the duration of the purchase program "as conditions warrant."
The Fed also is prepared to purchase longer-term Treasury securities "if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
As for inflation, the Fed said that "in light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, it expects that inflation pressures will remain subdued in coming quarters." Policymakers see some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
Noted inflation hawk Jeffrey Lacker, president of the Richmond Fed, was the only FOMC member to vote against the move, preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.
"Clearly, the picture is for continued Fed intervention in markets other than the funds market to try to 'support the functioning of financial markets'," says Standard & Poor's chief economist David Wyss.
Stocks were bolstered at the start of Wednesday's session by a press report that the FDIC might manage a "bad bank" to help stem the financial crisis. Investors were also awaiting a House vote on President Obama's $825 billion economic stimulus bill, with Obama confident of passage.
According to a Bloomberg News report, the FDIC may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said. FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks' balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said. President Barack Obama's team may announce the outlines of its financial-rescue plan as early as next week, an administration official said. The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks' bad debt, in the hopes of stemming a crisis that has stripped more than 1.3 million Americans of their homes.
Reuters reports President Barack Obama's $825 billion package to stem the U.S. recession headed toward anticipated passage today in a sharply divided House of Representatives. Most House Republicans were expected to oppose the proposal, saying it needs more tax cuts and less spending, but Democrats were confident that they had the votes to push it through as they seek a final bill for Obama to sign into law by mid-February. The Democratic-led Senate is expected to pass a somewhat more costly version of the proposal, which would force the two chambers to work out differences. But before the Senate votes, Republicans are hoping to win some modifications that would be supported by the Democratic president.
President Obama said his meeting with business leaders was sobering after being introduced by IBM and Honeywell executives who have pledged full support for the prompt passage of the American reinvestment and recovery plan in the next few weeks. Following rounds of layoffs and demand falling off a cliff, reports Action Economics, Obama is arguing for high tech solutions and investment in education and infrastructure, with accountability via the Internet on www.recovery.gov.
In economic news Wednesday, the Mortgage Bankers Association's Mortgage Applications index fell a seasonally adjusted 38.8% from the prior week even though interest rates charged on fixed-rate mortgages declined slightly over the week. MBA said application volume was down 40.4% versus the same week in 2008, according to the Washington-based MBA's weekly survey. The survey covers about half of all U.S. retail residential mortgage applications. Refinancing applications sank 48% for the week compared with the previous week. Filings for mortgages to purchase homes were down a seasonally adjusted 2.9% compared with the Jan. 16 week. Survey results also were adjusted to account for Martin Luther King Jr. holiday. According to the survey, rates on 30-year fixed-rate mortgages averaged 5.22% last week, down from 5.24% the week before. Fifteen-year fixed-rate mortgages averaged 4.98%, down from 4.99%, while one-year ARMs averaged 5.96%, up from 5.89%.
The ABC News/Washington Post consumer comfort index fell a point to -54 in the week ended Jan. 25, from -53 a week earlier, matching its worst level in the poll's 23-year history. The only other time the poll hit -54 was on Dec. 1, 2008. According to the survey, 5% of respondents expressed confidence in the economy, the same as the week before. Forty-one percent of those polled said their own finances were in good standing, down from 42% in the prior week. In assessing the buying climate, 23% of respondents said it was good, down from 24% a week earlier.
In company news Wednesday, Wells Fargo (WFC) posted a fourth quarter loss of 79 cents per share (including items), vs. 41 cents EPS one year earlier, on a 3.8% revenue drop, the addition of $8.1 billion to credit reserves, including a $3.9 billion provision to conform reserve practices of both Wachovia and Wells Fargo. The company said it has no plans to request additional TARP capital.
Yahoo Inc. (YHOO) posted a fourth-quarter GAAP loss of 22 cents per share, vs. EPS of 15 cents one year earlier, on 1.4% lower revenue and more than $600 million in unusual charges. On a non-GAAP basis, however, the company posted 17 cents vs. 13 cents EPS. Yahoo reportedly sees first-quarter revenue in the range of $1.53 billion-$1.73 billion, compared with year-ago revenue of $1.82B.
Boeing Co. (BA) reported a fourth-quarter loss of 8 cents per share, vs. $1.36 EPS, on a 27% revenue drop. The company said the current-quarter results reflect the now-settled machinists' strike (the EPS impact was estimated at $1.09 per share), and other charges totaling 70 cents per share. The company sees $68 billion-$69 billion 2009 revenue and $5.05-$5.35 EPS.
AT&T (T) reported fourth-quarter EPS of 41 cents, vs. 51 cents one year earlier, as higher expenses offset a 2.4% rise in revenues; fourth-quarter adjusted EPS were 64 cents, vs. 71 cents. The company sees 2009 consolidated revenue growth in low single-digit range, led by gains in wireless and IP data services, stable reported consolidated earnings and margins excluding pension and retiree benefit costs. AT&T sees about 19 cents of incremental noncash pressure to 2009 reported EPS due to increased expenses related to pension and retiree benefits.
Sun Microsystems (JAVA) posted a second-quarter GAAP loss of 28 cents per share vs. 32 cents EPS on an 11% revenue decline and a narrowed gross margin. the current quarter includes a charge of $222 million primarily related to its restructuring announcement of November, 2008. Sun posted 15 cents vs. 50 cents non-GAAP EPS. Wall Street was looking for loss of 10 cents.
Target Corp. (TGT) said it will reduce the staff at its headquarters by 9%, affecting about 600 employees and 400 open positions, and close a Little Rock, Ark., distribution center. The majority of these changes are effective Wednesday. Target added that it expects to record a charge of about 3 cents per share, the majority of which will occur in its fiscal 2009 fourth quarter, and that it believes the annualized benefit resulting from these actions will exceed the charge.
Moody's Investors Service says it is reviewing for possible downgrade the long-term AAA credit rating on General Electric Co. (GE), citing increased uncertainty over General Electric Capital's (GECC) asset quality and future earnings performance.