The Federal Reserve raised interest rates for the third time this year on Tuesday, an action that is normally thought to be the kiss of death for the securities markets.
But instead of holding a wake, Wall Street threw a party, sending the Dow Jones industrial average up 171.58 points to 10,932, its highest close since its record high of 11,030 on Sept. 13. Similarly, the NASDAQ added 73.51 to reach a record 3,293, and the S&P 500 rose 25.64, also a record at 1,420.What's going on here? Don't stock traders know bad news when they hear it?
Well, the answer seems to be that Wall Street expected the Fed to hike its federal funds rate from 5.25 percent to 5.50 percent and that had already been factored into stock prices. The Fed also raised its discount rate a quarter of a point to 5 percent and that, too, was no shocker.
Sterling Jenson, president and CEO of First Security Investment Management Inc., said Wednesday that the key to the market's reaction was the "neutral bias" adopted by the Fed, meaning it is not leaning one way or another in terms of future interest rate policy.
"The Fed has now taken back the three interest rate cuts it made last year, so the market figures the Fed is now out of the way, and investors can stop worrying about inflation and interest rates and concentrate on corporate growth and profits."
In early trading Wednesday, the Dow was down 12 points, but the NASDAQ was charging ahead once again, up 20 points to 3,313.
The equities markets' gurus were thought to be evenly split on the "will they or won't they" issue prior to Tuesday's meeting of the Fed's Open Market Committee -- a Washington, D.C.-based group that seems more powerful these days than the folks who hang their hats at 1600 Pennsylvania Ave.
Jeff Thredgold, president of Salt Lake-based Thredgold Economic Associates and consultant to Zions Bank, had been forecasting a "55-60 percent probability" that the Fed would "tighten its economic policy" -- economese for raising rates.
He now believes there will be no further rate hikes at least through the first quarter of next year.
Kelly K. Matthews, chief economist for First Security Corp., was a bit surprised at the Fed's decision. He had thought they might "take a breather" until next year since there is no sign of inflation. As it is, it seems the Fed wants to slow growth at any cost.
"Three interest rate hikes haven't yet slowed the economy, and that's the reason he (Fed Chairman Alan Greenspan) gave for for doing it in the first place. But I would suggest that growth is not evil, it's not a bad thing. Just because we have a tight labor market, that doesn't automatically translate into an inflationary environment."
As for the market's reaction, Matthews agrees that it is a combination of no surprises -- Wall Street hates surprises more than it hates bad news; the removal of uncertainty -- the Street hates uncertainty even more than surprises; and expectations of high profit growth for big business, all combining to make "a pretty nice investing environment."
In other words, even Alan Greenspan can't stop the running of the bull (market) when investors think his fears of inflation are more nervous mutterings than sound economics.
In any case, Matthews believes that Greenspan will get his wish that the current 4-plus percent growth rate will move closer to 3 percent.
"That's my forecast, and we're moving in that direction. When that happens, maybe everyone will be happy."