Stocks, gold, and the dollar had BIG reversals today. Here’s why…
Federal Reserve policy makers at their last meeting said a global slowdown and a stronger dollar posed potential risks to the outlook for the U.S. economy.
A number of participants said growth “might be slower than they expected if foreign economic growth came in weaker than anticipated,” according to minutes of the Sept. 16-17 Federal Open Market Committee meeting released today in Washington.
Stocks rose and the dollar was lower as investors speculated that caution over the economic outlook would lead the Fed to keep interest rates near zero for longer.
“This is dovish with capital letters from beginning to end,” said Ward McCarthy, chief financial economist at primary dealer Jefferies Group LLC in New York.
Officials cautioned that spillover from Europe’s cooling economy and low inflation could boost the dollar further, curbing U.S. exports, and restrain price gains that have lagged behind the Fed’s 2 percent goal.
“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector,” the minutes said.
The International Monetary Fund yesterday cut its outlook for global growth in 2015 to 3.8 percent from a July forecast of 4 percent. It saw U.S. growth of 3.1 percent next year.
Gold rose and the dollar fell. Gold was up 0.7 percent $1,216.82 per ounce at 2:38 p.m. in New York and the Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, was down 0.4 percent.
U.S. stocks extended gains after the minutes were released. The Standard & Poor’s 500 Index rose 1.3 percent to 1,960.62 and the Dow Jones Industrial Average climbed 213.99 points, or 1.3 percent, to 16,933.38.
Regional Fed presidents including Atlanta’s Dennis Lockhart, New York’s William C. Dudley and Chicago’s Charles Evans have all said in the past month they are watching the dollar as officials debate the timing of the first interest-rate increase since 2006.
The FOMC last month retained a pledge to keep interest rates near zero for a “considerable time” after it concludes an asset purchase program that’s due to end after its October meeting.
“Some participants saw the current forward guidance as appropriate in light of risk-management considerations, which suggested that it would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the committee’s goals,” minutes of the gathering show.
“Not only are they not ready to raise rates, they don’t even want people to think they’re ready to raise rates, so it’s not even on the radar screen,” McCarthy said.
At the same time, “the concern was raised that the reference to ‘considerable time’ in the current forward guidance could be misunderstood as a commitment rather than as data dependent,” the minutes said.
Some officials have said dropping the pledge would offer more flexibility to react to new economic data. Dallas Fed President Richard Fisher and Philadelphia’s Charles Plosser both dissented against the September FOMC statement.
The minutes showed there was a discussion on financial stability and developments including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads.
Since last month’s FOMC statement, the September jobs report has shown that a labor-market rebound continues, with a 248,000 gain in payrolls last month after a 180,000 increase in August that was bigger than previously estimated. That pushed unemployment to a six-year low of 5.9 percent, according to the Labor Department.
Other indicators, such as data on the duration of unemployment and the number of people working part time because they can’t find full-time work, still suggest slack remains in the jobs market.
“The labor market has yet to fully recover,” Fed Chair Janet Yellen said at a press conference after the FOMC meeting. “There are still too many people who want jobs but can’t find them.” She added that inflation remains below the Fed’s goal.
Projections released Sept. 17 show most officials foresee an interest-rate increase sometime next year. The central bank has kept its benchmark rate near zero since December 2008.