Stocks, Treasuries rally as dollar drops on Fed-rate timing bets

(Bloomberg) — U.S. stocks rallied with Treasuries, while the dollar tumbled after the Federal Reserve said data suggest economic growth has moderated and officials indicated interest rates will rise slower than they previously estimated.

The Standard & Poor’s 500 Index surged 1.2 percent at 4 p.m. in New York, erasing an earlier drop of 0.6 percent. The Russell 2000 Index of small companies rose to a record, while the Nasdaq Composite Index briefly climbed above 5,000. The yield on 10-year Treasury notes sank 14 basis points to 1.92 percent. The Bloomberg Dollar Spot Index dropped 1.6 percent. Oil advanced 2.4 percent to halt a six-day losing streak. Gold surged 1.8 percent, the most since January.

Stocks surged as investors saw the statement as doing little to speed up the schedule for higher interest rates. Officials said they’d wait for confidence that economic growth is pushing up prices while at the same time noting that growth has moderated. Fed officials also lowered their median estimate for the federal funds rate at the end of 2015 to 0.625 percent, compared with 1.125 percent in December forecasts.

“There’s not enough time between now and June to say inflation expectations have bottomed out, which probably pushes you out to September,” John Canally, chief economic strategist at LPL Financial Corp., which oversees $475.1 billion, said by phone. “The statement about the economy softening a bit raises the market’s awareness that the economy is under-performing where the Fed wants it to be, which pushes them out.”

The central bank said higher interest rates in April are unlikely and it won’t tighten until it is “reasonably confident” inflation will return to its target and the labor market improves further.

Rate bets

Fed-funds futures trading in the U.S. showed a 42 percent chance the central bank will raise its benchmark rate to at least 0.5 percent by September, according to data compiled by Bloomberg. Prior to Wednesday’s policy statement, the odds were 54 percent.

While the Fed dropped an assurance it will be “patient” in raising interest rates, Chair Janet Yellen said it doesn’t mean the central bank will be impatient. She also said the Fed is likely to remain “highly accommodative” even after its first rate hike.

“What was unexpected is that their expectations for growth in the economy came down, as did their expectation for inflation,” Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at Stifel Nicolaus & Co. in Florham Park, New Jersey, said by phone. “Consequently, even though they removed the patient language, they’re also telling the market through these reduced expectations that the path for interest rates increases is going to be relatively shallow.”

April unlikely

Yellen is preparing for an exit from the most aggressive easing in the Fed’s 100-year history. The central bank is trying to reconcile a strong labor market with falling inflation as it moves closer to lifting borrowing costs this year.

The S&P 500 has more than tripled since its bear-market low in March 2009, propelled higher by unprecedented central-bank monetary stimulus and a rise in corporate profits.

“An increase in the target range for the federal funds rate remains unlikely at the April” meeting, the Federal Open Market Committee said in a statement Wednesday in Washington. The panel said it will be appropriate to tighten “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Dollar strength

Officials added the phrase “patient” in their December statement, removing a reference to “considerable time” in describing how the central bank plans to normalize its monetary stance. Yellen has said the promise to be “patient” means the FOMC would probably wait at least two meetings before raising rates.

The Fed must contend with the effects of a higher dollar. The Bloomberg Dollar Spot Index, which measures the U.S. currency against 10 leading peers, had been trading near the highest level in data going back to 2004.

A stronger currency can limit the pace of expansion by making U.S. exports more expensive, and it threatens to further restrain inflation, which has lagged behind the Fed’s goal for 33 straight months.