Stocks climb, Dow ends up 121 after Fed news

July 30 00:40 2015

Stocks rose Wednesday and held onto early gains after the Federal Reserve modestly upgraded its economic outlook but stayed quiet on rate hike prospects at the conclusion of its two-day policy meeting. The Fed’s more positive appraisal of the economy leaves the door open for a possible rate hike at its next meeting in September.1215-stock-market_full_600

The Central Bank continues to be very open about its plans for coming rate hikes, and today’s statement puts it on track for a move at some point later this year. One market pro says any negative market reaction to the first rate increase will likely be “short-lived.” “If the market isn’t prepared for a rate hike, it must be asleep given all the Fed warnings,” Nick Sargen, chief economist and senior investment advisor at Fort Washington Investment Advisors said. “It’s a coin toss whether the Fed will move in September or later this year, but I expect them to start the process.  The stock market could sell off on the news, but I think it would be short-lived unless the Fed signaled another move could be coming.”

The Dow Jones industrial average ended up 121 points, a gain of 0.7%, to 17,751.39, building on its 190-point gain Tuesday, which snapped a five-session downtrend, its longest funk since early January. The Standard & Poor’s 500 index also climbed 0.7%, and back above the key 2100 level, to 2108.57. The Nasdaq composite index ended up 0.4%. Markets seem to take Fed Chair Janet Yellen at her word and believe the Fed will raise rates gradually.

“The Fed will want to increase the policy rate at least once this year for three reasons: to show markets that it takes the threat of inflation seriously; to signal that the period of loose liquidity and cheap money is coming to an end; and to test the market response to the first rate rise in nine years,” says Joseph Lake, global economist for The Economist Intelligence Unit. “However,” he adds, “the focus on the date of the first rate rise has been overblown and it has distracted attention from the steepness of the upward path that the Fed Funds rate will take over the next year. Yellen has said the Fed expects a “gradual evolution” of the rate, which suggests a fairly shallow take-off path.”