Stocks Slump in Post-FOMC Reversal
The Fed characterized inflation as "subdued", and said it would extend its program to purchase mortgage-backed securities and agency debt through the first quarter of 2010, keeping the program at its present $1.25 trillion size.
On Wednesday, the 30-stock Dow Jones industrial average finished lower by 81.32 points, or 0.83%, at 9,748.55. The broad Standard & Poor's 500-stock index was down 10.79 points, or 1.01%, at 1,060.87. The tech-heavy Nasdaq composite index shed 14.88 points, or 0.69%, to 2,131.42.
On the New York Stock Exchange, 19 stocks were lower in price for every 10 that advanced. Breadth on the Nasdaq was 16-10 negative The telecom, tech, and consumer goods sectors were higher; oil and gas issues were lower.
Volatile Treasuries rose slightly after the Fed statement, despite disappointing results from the government's auction of $40 billion in five-year notes. The dollar index rose. Gold futures fell. Oil futures fell on inventory increases.
The Fed said in its statement that data received since the August FOMC meeting "suggests that economic activity has picked up following its severe downturn." The Fed added that conditions in financial markets have improved further, and activity in the housing sector has increased. "Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," the fed aid.
The statement noted that businesses are still cutting back on fixed investment and staffing, though at a slower pace.
"Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability," the Fed said.
Regarding inflation, the central bank said that With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, it expects that inflation will remain subdued for some time.
The Fed reiterated its ongoing program 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, as well as $300 billion of Treasury securities. The central bank said it will "gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010" -- an extension of its previous target of yearend 2009. The Federal Reserve said its Treasury purchases will be completed by the end of October 2009, unchanged from the previous statement.
The FOMC vote was unanimous.
Analysts noted some telling changes in the language employed by the central bank in its latest statement. The important take-aways from the September Fed meeting are that "the Fed has no intention of raising the fed funds rate for the foreseeable future, but is only going to employ a 'wide range of tools' rather than 'all available tools' to promote economic recovery and to preserve price stability," wrote economists at Jefferies Economics in a note after the Fed decision Wednesday. "That leaves us to wonder which tools are going back on the shelf."
"The FOMC's policy statement didn't contain any of the feared references to an exit strategy, including a removal of stimulus, or a reduction in buyback programs," noted analysts at Action Economics. Fed officials have started talks with bond dealers to use so-called reverse repurchase agreements to drain some of the cash the central bank has pumped into the economy, according to people with knowledge of the discussions cited by Bloomberg.
Treasury Secretary Timothy Geithner said in Congressional testimony Wednesday that strengthening the financial system to the point that failure of large firms could occur without significant collateral damage was the main goal of reforms. He argued that separating rule writing from enforcement is a recipe for bad regulation and he wants to keep financial firms from facing a choice of either losing revenue or matching risk practices of competitors.
According to press reports, the U.S. will urge world leaders this week to launch a new push in November to rebalance the world economy. A document outlining the U.S. position ahead of the Sept. 24-25 Group of 20 summit in Pittsburgh said exporters should consume more, while debtors like the United States ought to boost savings.
In economic news Wednesday, the MBA mortgage applications index rebounded 12.8% in the week ended Sept. 18.
The ABC News consumer comfort index rose 3 points to -46 in the week ended Sept. 20 from -49 a week earlier. The survey said 10% of respondents expressed confidence in the economy, compared with 9% the week before. Also, 45% of those polled said their own finances were in good standing, up from 44% in the prior week. In assessing the buying climate, 26% of respondents said it was good, up from 24% a week earlier.
In company news Wednesday, General Mills (GIS) posted first-quarter earnings per share (EPS) of $1.25, vs. $0.79 one yer earlier, on a 0.6% sales rise. Wall Street Street was looking for EPS of $1.03. The maker of Cheerios and Betty Crocker products cited solid growth in US retail net sales. The company raised its $4.20-$4.25 EPS estimate for 2009 to $4.40-$4.45.
Disk-drive maker Seagate Technology (STX) expects first-quarter revenue to be at or slightly above high end of its original guidance of $2.4 billion-$2.6 billion.
H.B. Fuller (FUL), a maker of adhasives and paints, eported third-quartr EPS of $0.72, vs. $0.44 one year earlier, on an $18.8 million (pre-tax) one-time gain related to settlement of a lawsuit filed against the former owners of the Roanoke Cos. Group, a business acquired by Fuller in 2006. Excluding the settlement, EPS were $0.48, vs. Wall Street's forecast of $0.38. Revenue fell 13% due to lower volume and unfavorable foreign currency translation.
Freddie Mac (FRE) announced that Ross J. Kari, a veteran finance executive, has been appointed CFO, effective Oct. 12.