U.S. Stocks Close Higher As Fed Reiterates Interest Rates Will Remain Unchanged Through 2023

Reflecting a positive reaction to the Federal Reserve’s highly anticipated monetary policy announcement, U.S. stocks ended Wednesday’s trading mostly higher. With the upward move, the Dow and the S&P 500 reached new record closing highs.

The major averages all finished the day in positive territory, with the tech-heavy Nasdaq showing a significant rebound after moving sharply lower in early trading.

After tumbling by as much as 1.5 percent, the Nasdaq ended the day up 53.64 points or 0.4 percent to 13,525.20. The Dow also advanced 189.42 points or 0.6 percent to 33,015.37 and the S&P 500 rose 11.41 points or 0.3 percent to 3,974.12.

The higher close on Wall Street came after the Federal Reserve forecast stronger economic growth and higher inflation this year but indicated it expects to keep interest rates at near-zero levels through 2023.

The Fed provided updated forecasts along with the announcement of the its universally expected decision to maintain the target range for the federal funds rate at zero to 0.25 percent.

The central bank also reiterated it plans to continue purchasing bonds at a rate of at least $120 billion per month until “substantial further progress” has been made toward its policy goals.

The Fed said members now expect U.S. GDP to soar by 6.5 percent in 2021 compared to the 4.2 percent spike forecast last December.

The forecast for the pace of growth in core consumer prices, which exclude food and energy prices, was also upwardly revised to 2.2 percent from 1.8 percent.

In its accompanying statement, the central bank acknowledged that indicators of economic activity and employment have turned up recently.

Nonetheless, the median forecast from Fed members predicts interest rates will remain at current levels through 2023.

The latest projections from the Fed helped offset recent concerns about the outlook for rates, with treasury yields pulling back off their highs after spiking early in the session.

The Fed once again reiterated that rates will remain unchanged until labor market conditions have reached levels consistent with its assessments of maximum employment and inflation is on track to moderately exceed 2 percent for some time.

The latest forecasts show GDP growth is expected to slow to 3.3 percent in 2022 and 2.2 percent in 2023, while core consumer prices are expected to rise by 2.0 percent in 2022 and 2.1 percent in 2023.

“The updated economic projections released after the Fed’s mid-March meeting show that officials expect strong economic growth this year to have only a transitory impact on inflation, which explains why most still aren’t thinking about thinking raising interest rates,” said Michael Pearce, Senior U.S. Economist at Capital Economics.

He added, “With the Fed keen to let inflation run above its target for a while, we expect they will keep rates on hold even if higher inflation proves a little more stubborn than they currently anticipate.”

The statement from the Fed once again noted the path of the economy will depend significantly on the course of the coronavirus, including progress on vaccinations.

Sector News

Housing stocks moved sharply higher over the course of the trading session, driving the Philadelphia Housing Sector Index up by 3.3 percent to a record closing high.

The rally by housing stocks came despite the release of a Commerce Department showing a much bigger than expected decrease in housing starts in the month of February.

Substantial strength also emerged among airline stocks, as reflected by the 2.5 percent jump by the NYSE Arca Airline Index.

Gold stocks also turned in a strong performance on the day, with the NYSE Arca Gold Bugs Index climbing by 2.4 percent to its best closing level in over a month.

The strength among gold stocks came as the price of the precious metal spiked in electronic trading after ending the regular session modestly lower.

Computer hardware, semiconductor and brokerage stocks also moved notably higher, while utilities stocks moved to the downside.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a lackluster performance on Wednesday ahead of the Fed announcement. Japan’s Nikkei 225 Index and China’s Shanghai Composite Index both ended the day nearly unchanged.

Meanwhile, the major European markets ended the day mixed. While the U.K.’s FTSE 100 Index fell by 0.6 percent, the French CAC 40 Index closed nearly unchanged and the German DAX Index rose up by 0.3 percent.

In the bond market, treasury yields moved notably higher in morning trading but pulled back following the Fed announcement. The yield on the benchmark ten-year note, which moves opposite of its price, ended the day up by 2 basis points at 1.641 percent after reaching an intraday high of 1.689 percent.

Looking Ahead

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, although a report on weekly jobless claims is also likely to attract some attention.

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