U.S. Stocks Rebound As Fed Sounds Confident On Economy

NEW YORK (MarketWatch) -- U.S. stocks rebounded on Wednesday after the Federal Reserve kept interest rates unchanged and noted that while economic growth is slowing, it still considers inflation the number one risk as it expects moderate growth to continue.

"No one is really surprised," said Jay Suskind, director of trading at Ryan Beck & Co. "The market whisper was that they would show more concern about inflation."

"The market rallied back up because the flipside is that this means the economy is doing well enough and earnings will stay strong," Suskind said.

The Dow industrials were up 41 points at 13,350, rebounding from weakness right after the Fed announcement. The Dow earlier hit a new record high of 13,369.

Leading the Dow were shares of Honeywell Inc. , Verizon Communications , JP Morgan Chase & Co. and McDonald's Corp. .

International Business Machines , also a Dow component, rose 0.9% after being upgraded to buy from neutral at Goldman Sachs after the technology giant's buyback move.

Weighing on blue chips, Walt Disney & Co. dropped 1.2% after the entertainment giant didn't generate as much revenue as analysts had forecast, though its 27% profit rise came in ahead of forecast.

The S&P 500 index gained 3.8 points to 1,511, while the Nasdaq Composite lost 4.6 points to 2,576.

Tech shares remained under pressure, weighed by Cisco Systems , which dropped 6.2% after predicting slowing revenue growth. The networking gear producer reported a 34% profit rise and 21% revenue rise.

By sector, telecoms , networking , internet led the declines. Semiconductors , airlines , and gold fell.

Trading volumes showed 1.2 billion shares exchanging hands on the New York Stock Exchange and 1.7 billion on the Nasdaq stock market. Advancing issues topped decliners by 20 to 11 on the NYSE, while decliners topped gainers by 15 to 13 on the Nasdaq.

Fed clocks in

According to Carl Weinberg, chief economist at High Frequency Economics, markets were is "universally positioned" for the Fed decision, with the only risk being that the central bank would be more bearish on the economy than expected.

In its policy statement, the Fed repeated the key statement that it could choose to move rates in either direction depending on the data even though inflation risks remain the paramount concern.

The Fed made only a few changes from its March 21 statement. In a nod to the weak first quarter growth rate of 1.3%, the Fed said growth had slowed, and adjustments in housing were ongoing, but it maintained its outlook for the economy to continue growing at "a moderate pace."

The Fed had already predicted "moderate growth" at the end of last year, "just before growth slowed to the first quarter's paltry 1.3%," said Ian Shepherdson, chief U.S. economist at HFE.

"Bottom line: Until the unemployment rate starts to move or payrolls tank, they're on hold," he wrote in a note, adding that he expects the Fed to start cutting rates in August.

Time for pull-back?

Investors are also consolidating some of the market's record gains of the past two months. Through Monday's close, the Dow industrials had matched a 80-year old record of advancing in 24 out of 27 sessions. The average fell back on Tuesday.

"An acceleration in merger-and acquisition activity has caused the stock market to surge higher, despite [slowing] earnings growth and the weaker-than-expected economic outlook," said Bob Doll, global chief investment officer at BlackRock.

"Such divergences are not enough to warrant selling cyclical positions, but they do warn that the recent one-way ride up in equity prices could hit turbulence at any point in time," he said.

Other markets

Bonds fell, sending yields higher, after the Fed decision. The benchmark 10-year Treasury bond fell 6/32 at 98 24/32, yielding 4.659%.

Crude oil futures were down 7cents at $61.51 a barrel before weekly inventory numbers.

Gold futures also fell, losing $5.10 to $682.30 an ounce.

On the metals scene, Rio Tinto climbed over 10% on market speculation that the world's number one miner, BHP Billiton , launched a takeover offer. Rio Tinto said it's not aware of any approach.

The Rio Tinto gains come amid a number of consolidation moves in the metals sector, including Alcoa's $27 billion hostile bid for rival aluminum producer Alcan . Previously there has been speculation that Rio or BHP may try to buy Alcoa.

Corporate news

Also on the M&A front, at least three groups of private-equity buyers are circling Alltel , The Wall Street Journal reported Wednesday. Alltel rose 1.2%.

Toyota Motor reported a 9% profit rise on 10% revenue growth in the January-to-March quarter, as U.S. and European sales growth offset flagging sales at home. The stock dropped 0.7%.

Toll Brothers , the luxury home builder, issued another profit warning, noting that tighter lending standards were affecting affordability at lower price points. Its shares were down 0.6%.

News Corp. , whose $5 billion bid for Dow Jones & Co. was disclosed last week, posted quarterly earnings of 27 cents a share, a 6.2% increase from the year earlier, and in line with analysts estimates. News Corp shares fell 1.6%.

Dow Jones is the publisher of this report.

By Nick Godt