Stocks surge after Fed raises interest rates
NEW YORK - Stocks shot up Wednesday after the Federal Reserve raised interest rates, a long-expected vote of confidence in the health of the U.S. economy.
The announcement and comments from Fed Chair Janet Yellen gave the markets a boost. The rate hike "reflects the committee's confidence that the economy will continue to strengthen," she said Wednesday in explaining the Fed's move to boost its key short-term interest for the first time since 2006.
The Dow Jones industrial average rose 224 points, or 1.3 percent, to close at 17,749. The Standard & Poor's 500 index gained 30 points, or 1.4 percent, to 2,073. The Nasdaq composite index added 76 points, or 1.5 percent, to 5,071.
"There were no Fed surprises, and the statement was rather dovish," said Peter Cardillo, chief market economist at First Standard Financial. "The comments during the press conference added to the fact that the Fed is not going to be aggressive in raising interest rates. The fact the Fed feels comfortable with the economy is a positive."
The biggest gainers were utilities and telecommunications stocks, which rose 2.4 percent and 1.7 percent, respectively.
As most investors anticipated, the Federal Reserve raised its main interest rate by a quarter of a point. That rate had been near zero for seven years. For months the Fed has been suggesting it would make that move because the U.S. economy has improved a great deal since the financial crisis and the Great Recession.
The Fed said Wednesday that it expects the U.S. economy to keep growing and that it expects interest rates to stay low for some time. It emphasized that the performance of the economy will determine its next steps. The last time the Fed actually raised interest rates was in June 2006, before the crisis hit.
JPMorgan Chase, the biggest bank in the U.S. in terms of assets, said its prime rate will rise 0.25 percentage points to 3.5 percent tomorrow. A bank's prime rate is the interest rate banks use to price several of its consumer loans, including auto loans and credit cards. If a bank raises its prime rate, it means your credit card rate is also rising.
Paul Christopher, head global market strategist at Wells Fargo Investment Institute, said investors were pleased that the Fed is planning "gradual" increases in interest rates and won't move too fast, which could hurt the economy. But he said the Fed could have been clearer about what it plans to do over the next year and beyond.
"Not knowing leaves us still waiting month by month, week by week, even, for a consensus that might emerge in the markets about the Fed," he said. "Market participants will have to keep watching."
Stephen Freedman, senior investment strategist at UBS Wealth Management Americas, said the Fed is "taking off the Band-Aid" because the economy has substantially healed in the last seven years. But he said the Fed is likely to take some time restoring interest rates to normal levels because it doesn't want to hurt the economy.
"Three or four hikes next year would be, historically speaking, extremely slow and progressive," he said. "The Fed is not going to choke the economy."
Exactly seven years ago, the Fed cut its key interest rate to nearly zero because of deteriorating conditions in the economy and in financial markets. Spending, business investment and industrial production all fell. The Fed said on Dec. 16, 2008, that the federal funds rate would be "exceptionally low... for some time." The S&P 500 index was well under 900 points then. The unemployment rate, which was rising and would peak at 10 percent, is now 5 percent.
Oil prices and energy stocks skidded after the U.S. government said stockpiles grew 4.8 million barrels last week. The price of oil has plunged to its lowest levels in more than six years because supplies continued to rise as the global economy struggles.
Benchmark U.S. crude dropped $1.83, or 4.9 percent, to close at $35.52 a barrel in New York and Brent crude, a benchmark for international oils, lost $1.26, or 3.3 percent, to $37.19 a barrel in London. U.S. crude had climbed over the last two days after falling beneath $35 a barrel Monday.
Oil and gas stocks fell. Pioneer Natural Resources lost $8.92, or 6.2 percent, to $135.66 and Devon Energy dropped $1.78, or 5.6 percent, to $30.09. Exxon Mobil declined $1.21, or 1.5 percent, to $78.22. Natural gas, which has dropped to 16-year-lows, lost 3.2 cents to close at $1.79 per 1,000 cubic feet. Natural gas has been falling as traders anticipate weaker demand for home heating due to the unseasonably warm winter weather in the U.S.
The price of wholesale gasoline fell 1.2 cents to $1.233 a gallon and heating oil lost 3.5 cents, or 3 percent, to $1.112 a gallon.
The pace of homebuilding increased in November on a big jump in apartment construction in the Midwest and South, while construction of single-family houses reached an eight-year high. The Commerce Department said Wednesday that total housing starts climbed 10.5 percent.
U.S. government bond prices little changed. The yield on the 10-year Treasury note held steady at 2.28 percent. The euro edged up to $1.0970 from $1.0917 late Thursday while the dollar rose to 121.85 yen from 121.73 yen.
The price of gold rose $15.20, or 1.4 percent, to $1,076.80 an ounce and silver jumped 47.8 cents, or 3.5 percent, to $14.25 an ounce. Copper picked up 1.5 cents to $2.07 a pound.