Stock markets climb after Fed minutes show no rush to raise rates

North American markets switched course to turn sharply higher Wednesday afternoon after minutes of the Federal Reserve’s latest policy meeting showed that the Fed is reluctant to raise interest rates any time soon.

Canada’s main stock index had dropped to a 4 1/2-month low on Wednesday morning amid concerns that the global economic recovery and the low price of oil.

But after the Fed minutes were released at 2 p.m. ET, the TSX/S&P index turned positive. It closed up 90.02 points to 14,666.47.

The reversal on U.S. markets was even sharper. The Dow Jones industrial average rose  274.83 points to 16,994.22,

while the S&P 500 index rose 33.79 points to 1,968.89. Those were the biggest one-day gains this year.

The Nasdaq composite rose 83.39 points to 4,468.59.

Indexes had meandered between slight gains and losses earlier in the day after a steep dive during Tuesday’s session.

The minutes show Federal Reserve officials agreed at the Sept. 16-17 meeting that they would not link any rate change to any specific period. 

Interest rate worries

The officials were worried that any change to the wording of the guidance could be misinterpreted as a fundamental shift in the Fed’s stance on interest rates and could roil investors.

They said that they would begin raising interest rates only when measures of the economy’s health and inflation signaled the time was right, but agreed that their statement would remain unchanged to avoid any market fallout.

For now, the Fed decided to leave unchanged its statement saying that any increase in the short-term rate that it controls would not occur until a “considerable time” after it ends its monthly bond purchases.

They also indicated that they believe inflation will remain in check for some time, meaning rates can remain low, a factor that always encourages markets.

But the Fed, like the IMF in its World Economic Outlook yesterday, is wary of the health of the global economy.

The IMF noted low growth in Europe, Latin America and Japan and that could have an impact on the U.S., particularly if the U.S. dollar remains strong.  

A high dollar pushes up the price of oil and other commodities for most of the world and could lead to lower demand from Europe and Japan, hurting the U.S. trade balance.

Canadian dollar up

The Canadian dollar rose against the greenback today and was trading up 0.54 of a cent at 90.06 cents US.

Many analysts have expected the Fed to hike rates mid-2015, but a steady stream of positive U.S. data had persuaded some that it could push rates up even earlier. Adding to uncertainty about Fed intentions has been economic weakness in many areas outside of the U.S.

“The Fed remains in uncharted waters, faced with the dual task of raising rates amid plentiful reserves and reducing its balance sheet,” TD senior economist Michael Dolega said in a note to clients.

“Risks remain, with the Fed likely to proceed gradually so as to not stifle the recovery. The journey will be long, but we remain confident the Fed be will successful in navigating to more familiar territory despite the precise destination being shrouded in mist.”

On the TSX, gains were held back by the energy sector, losing almost one per cent, as investors reacted news of strong U.S. oil inventories.

The U.S. Energy Information Agency said Wednesday that U.S. oil inventories rose by 5.1 million barrels last week. Analysts had expected supplies to rise by 2.1 million barrels.

The November crude oil contract in New York fell $1.54 to a fresh 18-month low of $87.31 US a barrel.

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