Fed vows action to boost ailing economy

The central bank sees weakness for the foreseeable future and promises to act to jolt the ailing patient. Stocks give up afternoon gains. The dollar and oil drop. Housing starts rise.

By Charley Blaine Sep 21, 2010 1:53PM

Charley BlaineUpdated: 5:55 p.m. ET

The Federal Reserve left its key interest rates unchanged and will keep rates at record-low levels for the foreseeable future. But the Fed signaled that it may yet inject more cash into the financial system to prevent the economy from falling into a new recession.

Stocks initially surged on the decision, but the major averages faded in the last half-hour of trading and basically ended the day flat. Interest rates moved lower. The U.S. Dollar Index, which tracks the greenback against a basket of currencies, hit its lowest level since August.

The Dow Jones industrials ($INDU) were up 7 points to 10,761 after rising as many as 80 points after the Fed announcement. Still, the gain was the blue chips' fifth straight.  The Standard & Poor's 500 Index ($INX) was down 3 points to 1,140, and the Nasdaq Composite Index ($COMPX) dropped 6 points to 2,349.


The fade at the finish raised concerns that the September rally may have peaked. The Dow is up 7.5% this month, with the S&P 500 up 8.6% and the Nasdaq up 11.1%. Futures trading suggests a weak open on Wednesday. 


In addition, Adobe Systems (ADBE) was off 16.1% after hours to $27.73 after an earnings disappointment, which may pressure tech stocks.

The Fed gives itself an opening

The Fed's decision was expected. It will keep the target of its federal funds rate at 0% to 0.25%, where it's been since December 2008 after financial markets nearly fell apart in the fall of that year. The fed funds rate is what banks charge each other for overnight loans and is the foundation on which just about all U.S. interest rates are built. 


But the Fed is worried about the slowness of the recovery. Its statement today cites "substantial resource slack" in the economy, with high unemployment, modest income growth and softening gains in business investment for a very long time.


At the same time, the central bank said it was "prepared to provide additional accommodation if needed to support the economic recovery."

The Fed, by law, has a dual mandate: to promote economic growth and maintain stable prices. Its current concern is not inflation but, rather, deflation.


Many economists believe the earliest the Fed will make a move is at its Nov. 2-3 meeting, in large part because policymakers want to see more data.

The Fed conceded that the pace of the economic recovery continues to slow, although it sees some signs of stabilization.

Housing starts and building permits appear to be flattening, the Commerce Department said today.

High unemployment and employers' reluctance to add to payrolls and weak consumer spending are dragging on the economy, however.

The Labor Department reported that payrolls shrank in 36 states in August, with Michigan, Texas and California seeing the most job losses. Nevada has the nation's highest unemployment rate at 14.5%. North Dakota has the lowest at 3.6%.

While the National Bureau of Economic Research said Monday the recession ended in June 2009, the collateral damage remains substantial, including a 9.6% unemployment rate, minimal job growth, a collapsed housing market and weak retail sales.

But there have been signs of stabilization in recent days. Earnings from Oracle (ORCL) suggested that corporate spending on technology is steady at the very least. Apple's  (AAPL) sales are an indication that consumers haven't lost their love of gadgets. The mergers-and-acquisitions business is starting to heat up.

Railroads have consistently seen decent results all year.

And today there was some modestly good news on housing. Housing starts were up in August compared with July, mostly because of gains in apartment construction. But a gain is a gain.

In addition, cruise-line operator Carnival (CCL) said bookings going into the fall are solid and boosted its earnings guidance. Shares were up 1.4% to $37.57. 


Energy prices -- New York close
 

Tues.

Mon.

Month chg.

YTD chg.
Crude oil 

$73.52

$74.86

2.22%

-7.36%
(per barrel)











Heating oil

$2.1199

$2.1394

6.44%

0.20%
(per gallon)











Natural gas 

$3.9190

$3.8220

2.70%

-29.67%
(per mil. BTU)











Unleaded gasoline

$1.9078

$1.9148

3.35%

-6.49%
(per gallon)











Retail gasoline

$2.7210

$2.7260

1.64%

3.11%
(per gallon; AAA)












Crude drops; gold rises after hours

Crude oil fell $1.34 to $73.52 a barrel. Gold settled down $6.50 to $1,274.30 an ounce, but gold rallied to $1,287.40 an ounce after hours.

Interest rates were lower, with the 10-year Treasury yield falling to 2.621% from 2.706% on Monday.

The dollar was lower against major currencies, with the U.S. Dollar Index down more than 1% to 80.673. The index is off 6.5% this quarter as evidence suggests that a global recovery is intact.

Seventeen of the 30 Dow stocks were higher, led by Caterpillar (CAT), up 2.2% to $76.39. Caterpillar hit $77.11 during the session, a 52-week high.

Meanwhile, 35 stocks in the Nasdaq-100 Index ($NDX.X) were higher; the index was off very slightly to 1,989. The leader was graphic-chip maker NVIDIA (NVDA), up 5.4% to $11.29 after analysts at Pacific Crest Securities said the shares should hit $13 after the chip industry works off excess inventories.


Apple (AAPL) hit a new high, up 0.2% to $283.77. Amazon.com (AMZN) faded at the close, ending down 0.4% to $150.73 after hitting a 52-week high of $153.31.

Among other stocks seeing big moves today:

  • ConAgra Foods (CAG), down 3.6% to $21.57. The maker of Orville Redenbacher popcorn and Hunt’s ketchup is increasing its dividend to 23 cents a share from 20 cents. But fiscal-first-quarter earnings of 34 cents a share missed analyst estimates for 39 cents.
  • Hartford Financial Services (HIG), up 1% to $23.16. Barclays analyst Eric Berg boosted his rating on the insurer to "overweight" from "equal weight" by Eric Berg, an analyst at Barclays Plc.
  • Monsanto (MON), down 2.2% to $54.34. Morgan Joseph cut its rating on the seed company to "hold" from "buy."
  • Owens-Illinois (OI), down 6.1% to $27.59. The world’s largest maker of glass containers was cut to "neutral" from "outperform" by Macquarie Group.
  • SanDisk (SNDK), down 6.1% to $35.47. It was the biggest loser among S&P 500 stocks and Nasdaq-100 stocks and the Philadelphia Semiconductor Index ($SOX). Sterne, Agee & Leach downgraded the stock to neutral.

A little light on homebuilding

Homebuilders broke ground on 10.5% more homes in August as housing starts jumped to an annual rate of 598,000 from a revised 541,000 in July. Economists had expected housing starts to rise to 550,000.


But most of the gains came from starts for apartments. That tends to be a volatile group.

 

Applications for building permits rose to 569,000, stronger than the 560,000 expected. That's up from 559,000 in July, the lowest rate since May 2009.

 

Shares across the homebuilding sector traded broadly higher Tuesday, with the SPDR S&P Homebuilders ETF (XHB) rising 0.6% to $15.66. KB Home (KBH), moved up 2.9% to $12.31. Meritage Homes (MTH) rose 0.3% to $19.60. M.D.C. Holdings (MDC) was up 0.9% to $29.54.


Material from The Street.com was included in this post.

Short hits from the markets -- New York close
 
  Tues.

Mon.

Month chg.

YTD chg.
Treasury yields




 





13-week Treasury bill

0.155%

0.150%

14.81%

210.00%
5-year Treasury note 

1.311%

1.417%

-2.31%

-51.19%
10-year Treasury note

2.594%

2.706%

4.72%

-32.50%
30-year Treasury bond

3.785%

3.866%

7.13%

-18.44%
Currencies







 

 
U.S. Dollar Index

80.673

81.582

-2.79%

3.14%
British pound

$1.5555

$1.5552

1.32%

-3.84%
(in U.S. $)











U.S. $ in pounds

£0.6429

£0.6430

-1.30%

4.00%
Euro in dollars

$1.3137

$1.3067

3.61%

-8.34%
(in U.S. $)











U.S. $ in euros

€ 0.7612

€ 0.7653

-3.49%

9.10%
U.S. $ in yen 

85.54

85.67

1.71%

-8.02%
Canada dollar

$0.971

$0.971

3.50%

2.13%
(in U.S. $)











U.S. dollar 

$1.031

$1.030

-3.36%

-2.07%
(in Canadian $)











Commodities

 

 

 

 
Gold

$1,274.30

$1,280.80

1.92%

16.25%
(per troy ounce)











Copper

$3.4810

$3.5045

3.57%

4.02%
(per pound)











Silver

$20.6400

$20.8030

6.40%

22.53%
(per troy ounce)











Wheat 

$7.1800

$7.3175

10.04%

32.59%
(per bushel)











Corn

$5.0525

$5.0825

19.02%

32.59%
(per bushel)











Crude oil 

$73.52

$74.86

2.22%

-7.36%
(per barrel)










 

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