Benchmarks ended Wednesday’s choppy trading session slightly higher after Fed officials said the economy is ready for a rate hike this year. Meanwhile, Janet Yellen emphasized that the timing of a rate hike isn’t important; instead the focus should be on the pace and trajectory of rate hikes.
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The Dow Jones Industrial Average (DJI) gained 0.2% to close at 17,935.74. The Standard & Poor’s 500 (S&P 500) also advanced 0.2% to 2,100.44. The tech-laden Nasdaq Composite Index closed at 5,064.88; increasing 0.2%. The fear-gauge CBOE Volatility Index (VIX) declined 2.1% to settle at 14.50. A total of about 6.1 billion shares were traded on Wednesday, higher than this month’s average of 5.94 billion. Advancers outpaced declining stocks on the NYSE. For 51% stocks that advanced, 46% declined.
An overwhelming majority of Federal Reserve officials believe that the improving U.S. economy is strong enough to withstand one or two rate hikes this year. Only 2 out of the 17 officials believe the central bank should not raise rates before next year. The “dot plot” of Fed officials’ rate projections showed rates increasing to a median level of 0.625% by the end of 2015, indicating two rate hikes this year. However, 7 Fed officials took a dovish stance, expecting only one rate hike in 2015.
Officials at the Federal Open Market Committee policy meeting kept short term interest rates unchanged. The Fed has kept its benchmark interest rates at a near zero level since 2008. The central bank wants to see continued improvement in the labor market and inflation rate moving closer to its target rate of 2% before hiking rates.
Fed Chairwoman Janet Yellen said that “some progress” has been made on these two criteria but “room for further improvement remains”. Yellen added that Fed members haven’t yet decided to raise rates this year as the decision will depend on how the economy evolves. Yellen noted that the economy has “expanded moderately”.
Yellen did mention the economy managed to recover from the “soft patch” of the first quarter. Harsh winter weather, strikes at Western Coast ports, stronger dollar hampering exports and decline in business investment adversely affected economic growth in the first quarter. The central bank reduced its growth projections for this year due to the meltdown in the first quarter. Fed officials now see the economy expanding by 1.8% to 2%, down from an earlier projection of 2.3% to 2.7%.
Meanwhile, Yellen emphasized that the central bank’s policy will remain accommodative even after the first rate hike. She said: “Market participants should not focus on the timing of the first rate hike. What’s more important is the entire trajectory of interest rates”.
Nonetheless, high-yielding stocks from the utilities sector gained in anticipation of slower-than-expected rate hike. The Utilities Select Sector SPDR (XLU) gained 0.8%, the highest among the S&P 500 sectors. Key utilities stocks including NextEra Energy Inc (NEE – Analyst Report), Exelon Corporation (EXC – Analyst Report), Southern Company (SO), PG&E Corporation (PCG – Analyst Report) and Duke Energy Corporation (DUK – Analyst Report) increased 1.2%, 0.5%, 0.5%, 1.4% and 0.7%, respectively. Overall, 7 out of 10 sectors of the S&P 500 ended in the green.
Meanwhile, investors also kept an eye on Greece’s debt crisis ahead of the Eurozone finance ministers’ meeting, scheduled for Thursday. Greek negotiator Euclid Tsakalotos admitted that Greece doesn’t have enough money to make its debt payments to the International Monetary Fund on Jun 30. He said the country will make concessions, but pension cuts are not in the agenda. Greek Prime Minister Alexis Tsipras had refused to implement pension reforms and tax increases to achieve budget surpluses as demanded by Greece’s lenders.