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Stocks rally strongly on Fed caution on interest rates

A Wall Street sign near the flag-draped facade

A Wall Street sign near the flag-draped facade of the New York Stock Exchange on May 11, 2007. Credit: AP / Richard Drew

Stocks rallied strongly Thursday after the Federal Reserve signaled that it expects to move slowly in raising interest rates.

In a statement released at the end of a two-day meeting Wednesday, the Open Market Committee signaled that it needs to see further improvement in the job market and higher inflation before it raises interest rates from record lows.

At the same time, the Fed may have opened the door to a rate increase later this year by no longer saying it will be "patient" in starting to raise its benchmark rate.

At the end of trading on Wall Street, the Dow Jones industrial average was up 227.1 points, or about 1.3 percent, at 18,076.2. The Standard & Poor's 500 index added 25.1 points, or about 1.2 percent, to 2,099.4. The Nasdaq composite gained 45.4 points, or about 1 percent, to 4,982.8.

Stocks started the day in a slump as investors had expected the Fed to signal that it was getting closer to raising rates for the first time in close to a decade as the unemployment drops and on tentative signs that wages are picking up.

Bonds rallied, pushing the yield on the 10-year Treasury note below 2 percent. The dollar dropped against the euro and oil rebounded.

THE BACKDROP: Although the hiring picture in the U.S. has improved in recent months, wages have lagged and other indicators suggest that the U.S. economy is struggling to maintain its momentum.

A report Monday showed that output at U.S. factories fell for a third straight month in February, driven by a big drop in production at auto plants. Retail sales have also remained sluggish despite a big drop in gas prices that has put more money in consumers' pockets.

THE QUOTE: "This is clearly a dovish statement, particularly relative to market expectations," said Jeremy Zirin, the CIO of Wealth Management Research at UBS Wealth Management. "There is very little to suggest that the Fed is going to raise rates aggressively this year."

ENERGY: In late afternoon trading, benchmark U.S. crude oil jumped 88 cents to $44.34 a barrel on the New York Mercantile Exchange. It traded as low as $42.11 a barrel earlier. Brent crude, the international benchmark, was up 20 cents to $56.09 a barrel in London.

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