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Major Averages Close Mixed Following Fed Announcement - U.S. Commentary

wallstreet up 032918 20mar19 lt

Stocks saw typical volatility following the announcement of the Federal Reserve's latest monetary policy decision on Wednesday. The major averages showed wild swings before ending the day on opposite sides of the unchanged line.

While the Nasdaq inched up 5.02 points or 0.1 percent to a new five-month closing high of 7,728.97, the Dow dropped 141.71 points or 0.6 percent to 25,745.67 and the S&P 500 fell 8.34 points or 0.3 percent to 2,824.23.

The markets initially reacted positively after the Fed announced its widely expected decision to leave interest rates unchanged while also indicating the central bank no longer expects to raise rates this year.

The Fed decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent in support of its mandate of fostering maximum employment and price stability.

The central bank's forward projections also indicated interest rates are likely to remain unchanged for the remainder of the year.

The forecast for interest rates to be unchanged at the end of the current year compares to the December projections indicating two rate hikes.

The downward revision to the rate projections comes as the Fed noted data received since its January meeting points to a slowdown in economic growth from the solid rate seen in the fourth quarter of 2018.

The Fed reiterated that it will be patient as it determines future adjustments to interest rates to support a sustained economic expansion, strong labor market conditions, and inflation near 2 percent.

Kevin Doran, chief investment officer at AJ Bell, accused the Fed of kowtowing to the stock markets and President Donald Trump, who has been harshly critical of Powell and the central bank for raising rates.

"Despite protestations to the contrary, it seems evident that the Fed is kowtowing to stock market reaction to the prospect of higher interest rates and increasing levels of political interference," Doran said.

"It is all too obvious that nothing of significance is likely to happen on rates until such time that the asset price inflation being stoked by the current economic backdrop seeps its way into 'real world' inflation on the high streets," he added. "Maybe we should cut out the middle-man and leave Trump to announce rates on Twitter?"

Buying interest waned going into the close, however, as Fed Chairman Jerome Powell warned about the negative impact slowing economic growth in Europe and China will have on the U.S.

Meanwhile, the Fed also confirmed that it intends to conclude the gradual reduction of its balance sheet by the end of September.

The Fed noted it plans to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.

The central bank also said its intends to continue to allow its holdings of agency debt and agency mortgage-backed securities to decline, consistent with the aim of holding primarily Treasury securities in the longer run.

Sector News

Natural gas stocks moved sharply higher over the course of the trading session, driving the NYSE Arca Natural Gas Index up by 2.4 percent. The index ended the session at its best closing level in four months.

The rally by natural gas stocks came despite a decrease by the price of the commodity, as natural gas for April delivery fell $0.054 to $2.820 per million BTUs.

Substantial strength also emerged among gold stocks, which moved higher as the price of the precious metal rebounded in electronic trading. The NYSE Arca Gold Bugs Index surged up by 2.3 percent.

Oil producer and oil service stocks also saw considerable strength, as the price of crude oil for April delivery climbed $0.80 to $59.83 a barrel following the release of a report unexpectedly showing a steep weekly drop in U.S. crude oil inventories.

On the other hand, financial stocks came under pressure on the heels of the Fed announcement, dragging the KBW Bank Index and the NYSE Arca Broker/Dealer Index down by 3 percent and 2 percent, respectively.

A notable drop by FedEx (FDX) also weighed on the transportation sector after the delivery giant reported weaker than expected fiscal third quarter results and cut its full-year profit forecast.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower on Wednesday, although Japan's Nikkei 225 Index bucked the downtrend and rose by 0.2 percent. Hong Kong's Hang Seng Index fell by 0.5 percent, while Australia's S&P/ASX 200 Index dipped by 0.3 percent.

The major European markets also moved to the downside on the day. While the German DAX Index plunged by 1.6 percent, the French CAC 40 Index slid by 0.8 percent and the U.K.'s FTSE 100 Index fell by 0.5 percent.

In the bond market, treasuries moved sharply higher in reaction to the Fed announcement. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled by 7.9 basis points to a more than one-year closing low of 2.535 percent.

Looking Ahead

Reaction to the Fed announcement may continue to impact trading on Thursday along with reports on weekly jobless claims, Philadelphia-area manufacturing activity and leading economic indicators.

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