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Stocks resume climb after decision on interest rates

Thursday, May 10, 2007

NEW YORK -- Wall Street wobbled, then regained its stride Wednesday after the Federal Reserve told investors what they expected to hear: that inflation is still too high for comfort, but the central bank is holding interest rates steady. The Dow Jones industrials rose to another record close.

The central bank's Open Market Committee as anticipated left interest rates unchanged at 5.25 percent, as it has done since last summer. The statement that accompanied the decision was little changed from the one the Fed released after its last meeting in March; the assessment said policy-makers are keeping their inflation watch the priority despite a slower economy.

Though some investors were hoping the Fed would raise the possibility of a future rate cut, they weren't surprised by the committee's stance. Moreover, they were relieved to hear the Fed is not more inclined than it has been to raise rates, a move that would make access to capital more expensive and potentially hurt the stock market.

"The Fed said we're not going anywhere," Larry Smith, chief investment officer at Third Wave Global Investors. "They're not saying inflation is going to the moon, they're not saying it's a huge problem right now, but they're concerned that inflation won't come down to their comfort range."

The stock market has reacted well to the Fed's rate stance; the Dow has hit 42 record closes since the start of October, soon after the Fed stopped raising rates.

"I think the markets can react favorably without the Fed lowering rates," said Steven Goldman, chief market strategist at Weeden & Co., noting that rates will remain stable as long as the economy keeps growing moderately, as the Fed predicts it will, and inflation doesn't accelerate too much. "We walk this tight line, and equities continue to edge higher."

Bonds, however, have struggled in recent months, and the yield on the 10-year Treasury note remains lower than that of shorter-term issues -- indicating that traders are betting on even slower economic growth going forward. Bond prices dropped after the Fed statement, pushing the 10-year yield up to 4.67 percent from 4.64 percent late Tuesday, and the 2-year yield up to 4.73 percent.

The current interest rate environment is beneficial for the overall stock market, but not for bonds or financial institutions such as banks, noted Fred Cannon, managing director of Research at Keefe, Bruyette & Woods. "I would say the biggest risk to the banks is if the Fed stays on hold and we start to see credit deteriorate significantly."

All the major stock indexes gained Tuesday, boosted largely by signs that takeover activity continues to surge. Rio Tinto's stock jumped $31.62, or 12 percent, to $296.27, on rumors that BHP Billiton might bid for the company. BHP rose $2.51, or 4.9 percent, to $53.41.

But the technology-laden Nasdaq was weaker after Cisco Systems Inc. reported an abrupt slowdown in orders from U.S. business in its quarterly financial results. The computer network equipment maker's stock fell $1.85, or 6.5 percent, to $26.51, even though its fiscal third-quarter profit soared 34 percent.

The dollar was mixed against other major currencies, while gold prices fell.

Crude oil prices dropped 61 cents to $67.82 a barrel on the New York Mercantile Exchange, after the U.S. government said the nation's gasoline stockpiles increased last week. Gas prices at the pump are still, on average, above $3 a gallon for regular unleaded.

Advancing issues outnumbered decliners by about 7 to 4 on the New York Stock Exchange, where volume came to 1.56 billion shares, up from 1.50 billion Tuesday.

The Russell 2000 index of smaller companies gained 3.87, or 0.47 percent, to 834.77.

Overseas, Japan's Nikkei stock average rose 0.52 percent. Britain's FTSE 100 slipped 0.01 percent, Germany's DAX index advanced 0.45 percent, and France's CAC-40 added 0.29 percent.


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