Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Fed Watch: 1 Negative Surprise, 1 Sector That Benefited

Today belonged to the Federal Reserve, as far as U.S. stocks are concerned. As expected, volatility was muted before the 2 p.m. ET release of the Federal Open Market Committee's press release summarizing the outcome of its policy meeting. The impact of the statement and the press conference that followed was swift, with the benchmark S&P 500 ending Wednesday's session down 0.6%, after being down up to 1.2%, with the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) losing 0.7% (see following graph) on the day. One (interest rate-sensitive) sector that reacted positively was banks, with Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) gaining 1.4%, 1.6% and 0.4%, respectively:

^SPX Chart

^SPX data by YCharts

Rates guidance: Forget the unemployment rate
As expected, the Fed will reduce its monthly asset purchases by another $10 billion, beginning next month. More importantly, however, the Fed chose to de-couple its forward guidance on interest rates from the unemployment rate. Previously, it had said that a 6.5% rate was the threshold at which it would begin to consider raising interest rates. With the unemployment rate at 6.7% in February (and even touching 6.6% in January), that benchmark began to look obsolete, as it is clear that we are still some ways away from a first interest rate increase. Instead, the Fed statement pointed to a broader range of indicators:

In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

Rate increases: Just how far away are we?
The Fed's statement indicates that it will probably maintain interest rates at zero "for a considerable time after the asset purchase program ends." When she was asked to qualify how long that period might be, Janet Yellen went off-script, giving an answer that was uncharacteristically specific for a Fed chief by stating "something on the order of six months, or that type of thing," before adding the traditional caveat that the timing will depend on the labor market and inflation.

This was arguably the biggest surprise of the press conference. On the present taper trajectory, six months would put the first interest-rate rise during the second quarter of next year. That's a more aggressive timetable than the market was discounting (although let's not forget the "or that type of thing," which represents a significant margin of error), and it's probably not coincidental that this question/answer roughly coincided with stocks' intraday low.

The bottom line for investors
For market-timers and other short-term speculators, the minutiae of monetary policy are critical. Long-term investors, on the other hand, have the luxury of being able to ignore 99% of these debates. Whether the Fed raises rates in mid-2015 or at the end of next year will have minimal impact on the conduct and results of American business. Banks are something of an exception, because of their dependency on the yield curve; today's outperformance of the sector may have been driven by the prospect of earlier-than-expected rated hikes and, thus, a steeper yield curve -- a key driver of bank profits. I continue to think the three banks I mentioned in the opening paragraph offer decent long-term value – certainly better than the broad market.

Buy the big banks for OK returns, while this banking upstart makes smart investors rich
Do you hate your bank? If you're like most Americans, probably so. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the traditional bricks-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under Wall Street's radar. For the name and details on this company, click here to access our new special free report.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2882674, ~/Articles/ArticleHandler.aspx, 9/4/2015 7:20:56 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated Moments ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:30 PM
^DJI $16102.38 Down -272.38 -1.66%
BAC $15.65 Down -0.29 -1.82%
Bank of America CAPS Rating: ****
C $50.59 Down -1.20 -2.32%
Citigroup Inc CAPS Rating: ***
JPM $61.50 Down -1.18 -1.88%
JPMorgan Chase & C… CAPS Rating: ****