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Stocks rise as Fed keeps rates unchanged, drops "patient" posturing

Stocks edged up as investors reacted to the Federal Reserve’s latest monetary policy decision to keep benchmark interest rates unchanged.

The S&P 500 (^GSPC) increased 0.3%, or 8.71 points, as of market close. The Dow (^DJI) rose 0.15%, or 38.46 points, while the Nasdaq (^IXIC) rose 0.42%, or 33.44 points.

The bond market’s reaction to the Federal Reserve’s announcement was more pronounced. Treasury yields fell across the curve, with the more policy-sensitive shorter-term yields posting steeper declines. The two-year yield fell to as low as 1.741% as of 3:38 p.m. ET.

The Federal Open Market Committee (FOMC) announced in a statement Wednesday that it would keep benchmark interest rates unchanged at a band of between 2.25-2.50%, as had widely been expected. The vote was 9-1, with St. Louis Fed President James Bullard voting against the decision to hold rates steady and instead favoring a 25-basis point cut.

The Fed’s updated quarterly dot plot, which depicts the individual rate projections of each Fed policymaker over the next several years, showed that eight of 17 officials projected a reduction in benchmark interest rates by the end of 2019. Seven foresaw a 50-basis point reduction, while one expected a 25-basis point reduction.

The median dot reflected no rate changes through the end 2019, and one 25-basis point rate cut in 2020. The previous dot plot from March had shown a median dot calling for a rate hike in 2020.

Federal Reserve Chairman Jerome Powell speaks on a television as traders work on the floor of the New York Stock Exchange in New York, U.S., February 27, 2018. REUTERS/Lucas Jackson

Equities edged up as investors digested commentary in the Fed’s statement appearing to leave the door open to easier monetary policy. FOMC members dropped the word “patient” in their statement as applied to their monetary policy path forward. They instead said they would “closely monitor the implications of incoming information for the economic outlook.”

Members also wrote that they would “act as appropriate to sustain the expansion,” echoing previous public commentary from Fed Chair Jerome Powell, which investors had taken as a suggestion that a rate cut could soon be implemented.

In a press conference, Powell noted that “crosscurrents” had re-emerged in the weeks since the Fed’s last meeting, “raising concerns about the strength of the global economy.”

“The case for somewhat more accommodative policy has strengthened,” Powell said. However, he later noted that the U.S. consumer and consumption – which comprises 70% of domestic economic activity – remained strong.

As of Wednesday afternoon, markets priced in a 100% probability that a rate cut would take place before the end of 2019, according to CME Group. Investors’ calls for easier monetary policy had swelled in recent months as global trade concerns flared up and threatened to hinder economic growth.

A future rate cut by the Federal Reserve “could be characterized as an ‘insurance’ rate cut, a rate cut that is not justified by slowing economic growth but is instead meant to provide a measure of protection from potential but unpredictable risks,” Jason Pride, chief investment office of private wealth at Glenmede, wrote in an email. He added that the “main risk to the economic outlook remains U.S.-China trade relations.”

The Fed’s decision comes after European Central Bank (ECB) President Mario Draghi on Tuesday gave a speech signaling further stimulus – or easier monetary policy – would be warranted in the even of further economic deterioration. The comments sent European equities higher and the euro lower.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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