Investors reacted cautiously to the Federal Reserve’s latest statement on interest rates Tuesday, sending stocks slightly higher after the Fed suggested it would move carefully when raising the nation’s base lending rate.
The Fed’s Open Market Committee did not raise rates at its Tuesday meeting, but the panel’s comment after the meeting said the central bank would do so “at a pace that is likely to be measured.”
While the Fed dropped earlier language that said it would be “patient” in raising rates, investors felt the prospect of a measured, responsible increase was promising. However, it also raised uncertainty as to when the Fed would eventually act.
“To a great extent, the decision as well as the statement were generally expected,” said Hugh Johnson, chief investment officer at First Albany Corp. “They’ve responded to critics who say they should raise rates quickly and by a lot, and that’s very reassuring to investors. But they also built in a lot of flexibility on when they might raise rates.”
The Dow Jones industrial average was up 3.20, or 0.03 percent, at 10,317.20. The Dow had surged more than 68 points in late trading, but quickly gave up ground as analysts dissected the Fed’s statement.
Broader stock indicators were also higher. The Standard & Poor’s 500 index was up 2.02, or 0.2 percent, at 1,119.51, and the Nasdaq composite index climbed 11.76, or 0.6 percent, to 1,950.48.
With the strong rally in stocks in 2003 and a surge in the health of the nation’s economy, it was considered unlikely that the Fed would wait until year’s end to raise rates, as some analysts had previously expected, since the threat of inflation would be higher.
“The Fed certainly won’t give away the timing, but certainly as the situation warrants, they’ll raise rates,” said Scott Wren, equity strategist for A.G. Edwards & Sons. “Today they adjusted the language to let the market know what they’re thinking.”
A rate hike generally makes it more expensive for companies to obtain capital to fuel growth. The Fed’s forbearance on drastic rate increases would mean a gradual, more orderly impact on earnings that most companies could more easily handle.
While pointing to short-term economic data that showed some danger of inflation, the Fed said “long-term inflation expectations appear to have remained well contained.” While that may be good news to some investors, it provides little direction for a market that has ignored strong earnings and economic data to focus nearly completely on interest rates.
“The risk of deflation and inflation have equaled out. We’re in a very neutral place,” Wren said. “Until the Fed acts on rates, you can expect this kind of sideways-to-down movement in the stock markets.”
In the meantime, the economy continued to move forward. According to a new Commerce Department report, factory orders rose 4.3 percent in March, the biggest jump since July 2002. The reading was far higher than the 2.4 percent increase expected by economists. The stronger-than-expected rise in durable goods — appliances, vehicles and other long-lasting products — could mean higher demand, which in turn could cause prices to rise and trigger inflation.
Corporate earnings from the first quarter continued to be mostly positive. Tyco International Ltd. saw its profits increase more than fivefold from a year ago, fueled by lower costs and strong operating income from its various industrial segments. Tyco was up $1.09 at $29.07.
Radio station operator Clear Channel Communications Inc. skidded 25 cents to $41.79 after reporting earnings that beat Wall Street expectations by 2 cents per share. The company also reported that its chief executive underwent surgery for a blood clot in his brain Friday and was expected to recover.
Insurance company MetLife Inc. saw profits rise 44 percent for the quarter on investment gains and favorable claims. The company, which beat analysts’ estimates by 3 cents per share, nonetheless fell 29 cents to $34.59.
Priceline.com rose 55 cents to $25.42 as the online travel Web site swung to a profit on higher revenues and lower costs, beating estimates by 3 cents per share.
Not all the earnings reports were positive, however. Revenue at Qwest Communications International Inc. slipped, and the telecommunications company posted a loss of 17 cents per share, 4 cents worse than analysts had expected. Qwest dropped a penny to $4.01.
Advancing issues outnumbered decliners by about 4 to 3 on the New York Stock Exchange, where volume came to 1.69 billion shares, compared with 1.55 billion at the same point Monday.
The Russell 2000 index of smaller companies was up 4.16, or 0.7 percent, at 569.64.
Overseas, Britain’s FTSE 100 jumped 1.3 percent, Germany’s DAX index fell 0.4 percent, and France’s CAC-40 slipped 0.1 percent. Japan’s markets were closed for a holiday.