Fed stands pat on interest rates
The central bank makes no decisions on trimming its bond-buying and leaves its key rate at ultra-low levels. While the Dow and S&P end flat, July was their 2nd best month of 2013.
The Federal Reserve said Wednesday it expects to continue its $85-billion-a-month bond purchase program for the foreseeable future, delaying at least to September hard decisions on when to start tapering its stimulus efforts back.
Stocks initially rallied on the news, trying to regain highs seen early in the day. The bid ran out of gas, however, and the major indexes ended the day basically flat.
The Fed also will keep interest rates at ultra-low levels as it continues its efforts to boost the national economy. That's due in part because, the Fed suggested, the economy isn't as strong as it had been earlier in the year.
Ultra-low means the target on its federal funds rate remains at 0% to 0.25%. That's been the Fed's target since December 2008. The federal funds rate is what banks charge each other for overnight loans. It's the foundation on which all U.S. interest rates are built.
While the market fell back, July was still the best month since January for the Dow Jones industrials ($INDU) and the Standard & Poor's 500 Index ($INX). The Nasdaq Composite Index ($COMPX) enjoyed its best monthly performance since January 2012.
The Dow closed down 21 points to 15,500. The blue chips had risen 114 points in the morning to a new intraday high of 15,634. The S&P 500 ended down very slightly at 1,686. The Nasdaq added 10 points to 3,626. The index had risen as many as 32 points early in the day.
The Fed's announcement was expected. The central bank, however, has been debating how and when to scale back its bond-buying program, which also has been known as quantitative easing. The Fed is in the midst of its third-round of bond buying, a round that began in September 2012.
The Fed statement appeared to temper some optimism that had prevailed earlier in the year. It described the economy as advancing at "a modest pace" in the first half of the year. The Wall Street Journal noted the word "modest" hadn't been used in a Fed statement for more than three years.
In the last few statements, the Fed had been saying the economy was growing "moderately."
It also specifically acknowledged that mortgage rates have been rising. Bankrate.com's tracking of mortgage rates nationally shows the rate on a 30-year loan has risen from 3.36% in December to as high as 4.6% earlier in July before falling back to 4.36%.
The statement pointedly said -- as it did in June -- that fiscal policy is "restraining economic growth."
Since the 2008 financial crisis, the Fed has made billions of dollars available to be lent in this country and elsewhere. The goal was first to help stabilize matters after the panic, and then to seed economic growth.
Recently, however, it's been discussing how to taper down the bond-buying program and when it might raise interest rates. The central bank has said it plans to keep short-term rates near zero at least until the jobless rate falls to 6.5%. There's a caveat: Inflation has to remain in check. The jobless rate was 7.6% in June. The Labor Department will issue its July jobs report on Friday.
But Chairman Ben Bernanke (pictured) suggested in June the bond buying might be trimmed starting in the fall and ended some time in 2014. The Fed doesn't expect to raise its fed funds rate until 2015.
Many analysts had been predicting the tapering would begin in September, but the description of "modest" economic growth and concern about higher mortgage rates may be a signal that tapering might not start in September.
When Bernanke started to talk in May and June about winding down the bond-buying, markets panicked. The S&P 500 dropped 5.8% between May 21 and June 24. The index is up 7.2% since.
The yield on the 10-year Treasury note rose from 1.631% to 2.725% between May 2 and July 5 before stabilizing. It climbed to as high as 2.725% early Wednesday but dropped back to 2.593%, down from 2.603% on Tuesday.
The bond yield rose on the better-than-expected report on gross domestic product and the ADP Employment Index, which noted those 200,000 private-sector jobs. Professional and business services added 49,000 jobs. Construction expanded by 22,000, the report said.
The Labor Department's July report is due Friday.
The market's fade seemed to reflect some concern about the health of the economy and some worries about when the Fed will start to taper its bond purchases.
But the market was buffeted by end-of-the-month trading designed to square positions.
Still, it was a very good month for investors. The Dow and S&P 500 set new closing highs during the month and new intraday highs. The Nasdaq's close on Wednesday was its highest since Sept. 29, 2000.
The Dow is up 18.3% for the year. The S&P 500 is up 18.2%, and the Nasdaq is up 20.1%.
Since the March 2009 market bottom, the Dow is up 136.7%. The S&P 500 is up 149.2%, and the Nasdaq is up 185.9%. The Nasdaq-100 Index ($NDX) is up 196%, while the Russell 2000 Index is up 204.5%. The Dow Jones Transportation Average ($DJT) is up 201%.
Light sweet Crude oil (-CL) in New York was up $1.95 to $105.03 a barrel. Brent crude, the benchmark North Sea oil, jumped 90 cents to $107.81 a barrel. Light sweet crude was up 8.8% for the month. Brent was up 6.1% for month.
Gold (-GC) closed down $11 to $1,313 on the day but was up 7.3% for the month. For the year, gold is down 21.7%.
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The fed should have only three jobs.
1. Maintain an accurate and honest CPI.
2. Keep the real inflation rate between a deflationary 1% and 0% inflation (no more inflation). This will bring real earnings to saving. If, savers can earn real income on savings, interest rates will stay low. Also, it will increase the value of the dollar. This would move money to America (an estimate 5 trillion dollars).
3. Replace the fed with a computer program ASAP.
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Do it once a year. This allows the best-performing asset classes to take off and run.
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