Dow Closes 160 Down Points After Fed Holds Interest Rates

U.S. stocks closed lower Wednesday after the Federal Reserve stuck to its promise made in March not to raise interest rates this year, despite a call from President Trump to cut rates by 1 percentage point because of low inflation.

The Dow Jones Industrial Average closed 163 points down at 26,430, while the S&P 500 fell 22 points to 2,923, after hitting an all-time high. The Nasdaq Composite slipped 45.75 points to to 8,049.

Yields on U.S. Treasuries improved on Powell’s comment. The 2-year yield rose from a session low of 2.2 percent to trade back at 2.27 percent.

Fed chairman Jerome Powell said low inflationary pressures might only be “transitory,” eliminating hopes the Fed is at least considering the idea of a rate cut this year because of tame inflation. Powell’s comment came after the Federal Open Market Committee (FOMC) voted unanimously to maintain the benchmark rate in a range of 2.25 percent - 2.5 percent.

An IBT poll had showed that majority economists expected the Fed to leave interest rates unchanged at its 2-day policy meeting on April 30 where it evaluated key economic data. They projected the central bank to hold interest rates at 2.25 percent to 2.5 percent -- which is precisely what the Fed did.

The Fed says said inflation was a factor in its decision to freeze rates where they are. Government data showed the core personal consumption expenditure price index was unchanged in March and was up 1.6 percent year-over-year.

This rate is well below the Fed’s 2 percent target. President Donald Trump had urged the Fed to cut rates by 1 percentage point this week because of low inflation.

“On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent,” said the Fed.

Peter Boockvar, chief investment officer at the Bleakley Advisory Group, said that "the market was pricing in this rate cut. They want a rate cut and this was basically Powell saying, ‘sorry but we’re not'.”

The FOMC, however, made a technical adjustment aimed at keeping the funds rate closer to the midpoint of the target range. Interest paid on reserves banks keep at the Fed will now be set at 2.35 percent, or 0.05 percentage points lower.

The Fed retains its previous view that economic growth remains strong, saying “economic activity rose at a solid rate.” It pointed out that job gains “have been solid” and that unemployment rate “has remained low.” The jobless rate stands at 3.8 percent, the lowest level in 50 years.

On inflation, the statement said: “Market-based measures of inflation compensation have remained low in recent months.

“On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent,” said the statement.

Back in March, the Fed said it won’t raise rates in 2019 because economic growth has slowed. In ditching plans for any rate increases this year, the Fed kept the federal funds rate at 2.25 -2.5 percent. It now plans one rate hike in 2020, with the benchmark rate predicted to increase to 2.6 percent.