The markets rallied yesterday after the Federal Reserve Board said it is unlikely to raise interest rates again soon after a quarter-point hike in the overnight lending rate.
Fed watchers said Alan Greenspan’s decision to raise rates but remove the bias towards further tightening may have been influenced by Capitol Hill and disagreements within the central bank, but jubilant traders couldn’t have cared less why he did it.
Sluggish morning markets surged after the 2:15 p.m. Open Market Comittee announcement, with the Dow closing up 1.44 percent or 155.45 points at 10,970.80 and the Nasdaq rising 1.67 percent or 44.01 points to end trading at 2,686.12.
The S&P 500 closed up 21.21 points or 1.57 percent at 1,372.66 with interest-rate sensitive stocks from the Internet, technology and financial services sectors leading the charge in all markets.
Bonds soared. The benchmark 30-year Treasury bond climbed 15/32 to902/32. Its yield fell 9 basis points to 5.97 percent. Yesterday’s quarter-point rise had been expected for weeks, but traders had feared it would be the first in a series.
“The 25 basis points was a foregone conclusion, but what was surprising was the shift from a tightening bias to a neutral bias,” said Charles Pradilla, chief investment strategist at SG Cowen.
Pradilla said the markets had already priced in the rate hike and it would have scant effect on America’s roaring economy.
“It will have about as much impact as a small mosquito falling on Michael Jordan would affect his jump shot,” he said.
Greenspan’s term ends next year and some influential congressmen and industry leaders have been grumbling that the preemptive strike against inflation was unnecessary.
Senator Paul Sarbanes (D-Md.) – the ranking Democrat on the Senate Banking Committee, which would approve Greenspan’s renomination – said he was “disappointed” with the decison to raise rates.
Rep. Barney Frank (D-Mass.) told The Post he, too, thought the hike was unnecessary and would hurt the most vulnerable members of society.
“I noticed they said they were acting to prevent inflation or the potential emergence of inflation but when you start preventing the potential emergence, you’re three modifiers away from reality,” Frank said.
John Sweeney, head of the AFL-CIO, and Kwesi Mfume, head of the NAACP, joined Frank at a news conference earlier this week to protest the Fed’s expected rate hike.
The president of the National Association of Manufacturers, economist Jerry Jasinowski, also said the rate hike was not needed and he was tired of the “Kabuki theater” surrounding Greenspan’s pronouncement.
SG Cowen’s Pradilla said these pockets of vocal discontent had put pressure on some members of the FOMC and Greenspan’s removal of the bias – while also tied to the lack of more bad inflation news after April – may have been, in part, an attempt to ease it.