Fed rise ends uncertainty

Wall Street ended the first half of 2004 with a moderate advance today as the Federal Reserve’s widely expected interest rate hike allowed investors to put weeks of uncertainty behind them.

The markets’ reaction to the Fed’s move – which raises the benchmark lending rate by 0.25% – was somewhat muted, as the hike was exactly what investors had anticipated.

The increase, bringing rates off their 45-year low of 1% to 1.25%, was the first in four years.

Although the market worried about the size of the increase, and the Fed’s accompanying policy statement, there were few surprises in the end.

The Fed promised to continue a “measured pace” of rate increases to combat inflation.

And while it acknowledged there is a somewhat higher risk of inflation, the statement added that some of the inflation factors were transitory and that the risks were balanced.

“This has certainly been a very well telegraphed change in direction,” said Jack y, equities strategist at JP Morgan Private Bank. “It was an expected increase and a very balanced statement, both designed to keep the market confident in the Fed’s ability to manage the economy.”

The Dow Jones industrial average gained 22.05, or 0.2%, to 10,435.48.

Broader stock indicators were moderately higher. The Standard & Poor’s 500 index was up 4.56, or 0.4%, at 1,140.76, and the Nasdaq composite index gained 12.86, or 0.6%, to 2,047.79.

Wednesday marked the halfway point of 2004, as well as the end of the second quarter. So far this year, the Dow is off 0.2%, but the S&P 500 has gained 2.6% and the Nasdaq has climbed 2.2%. All three major indexes were up for the quarter as well as the month of June.

Most investors and analysts believe the Fed’s rate hike is the first of many, with another 0.25% increase possibly coming as early as the next Fed meeting in August.

But with rates historically low to begin with, the cost of borrowing will still be very good for corporate America and won’t unduly affect earnings.

“We’re now in a rising rate environment, and will be for some time. I think the equity markets realise that, and that’s already built into the curve,” said Josh Feinman, chief economist for Deutche Asset Management.

“The question is, do rates go up fast or slow, more or less? It’s the trajectory, timing and the ultimate magnitude that we’ll have to watch out for.”

Feinman said the Fed should be able to keep to its promise of a “measured pace” of rate hikes, just as long as the economy’s growth is moderate.

Before the Fed announcement, stocks were sluggish as investors hedged their bets against a surprise that never materialised. Investors are now looking ahead to the key Labour Department report on employment on Friday, as well as July’s second-quarter earnings reports.

“The anticipation of this rate hike has been far worse than the reality of it,” said Brian Bush, director of equity research at Stephens Inc. “I think it’s going to be a positive for the market to get past today’s announcement so we can start looking at earnings pre-announcements and the underlying economic data.”

Advancing issues outnumbered decliners by more than 5 to 2 on the New York Stock Exchange, where volume was light.

The Russell 2000 index of smaller companies was up 3.68, or 0.6%, at 591.51.