Stocks rise after Fed pledges to keep rates low

3/16/2010 12:16:00 PM

NEW YORK – Stocks held on to modest gains Tuesday after the Federal Reserve gave a mildly more upbeat view of the economy.

The Dow Jones industrial average rose more than 20 points in afternoon trading. Broader indexes also advanced. Prices for Treasurys rose.

The Fed, which also said it will keep interest rates low for "an extended period," said businesses are spending "significantly" more on equipment and software. The Fed also gave a marginally more upbeat assessment of the job market, though it said employers remain reluctant to hire.

"That's a major statement. That's saying that that's one major risk that's going to remain for a while," said Guy LeBas, chief fixed income strategist of Janney Montgomery Scott in Philadelphia.

Investors appear pleased overall that the Fed will hold rates low to help the economy recover. However, the market's reaction was less than ebullient as the Fed also described considerable weakness in the economy.

As the economy improves, the Fed will need to start increasing interest rates to fend off rising prices. For now, though, the Fed repeated that inflation is likely to remain subdued.

The Fed also said it still plans to stop buying mortgage-backed securities from Fannie Mae and Freddie Mac at the end of the month.

The market's subdued reaction to the Fed statement comes after the stock market has been carving modest gains for more than a month. Major stock indexes stand at or near their best levels in more than a year. Investors are looking for signs that the recovery is strong enough to justify the steep rebound in stocks in the past 12 months.

Stocks also got a lift after the Standard & Poor's credit rating agency signed off on Greece's plan to slash its budget deficit. That eased concerns that the debt-strapped country will default on debt. The 16 countries that share the euro agreed to help Greece with loans if necessary.

In late afternoon trading, the Dow rose 23.66, or 0.2 percent, to 10,665.81. The Standard & Poor's 500 index rose 5.85, or 0.5 percent, to 1,156.36, while the Nasdaq composite index rose 8.50, or 0.4 percent, to 2,370.71.

Major stock indexes ended narrowly mixed Monday after investors took a cautious approach ahead of the Fed's meeting.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.66 percent from 3.70 percent late Monday.

The dollar fell against other major currencies, while gold prices rose.

Crude oil rose $2.02 to $81.82 per barrel on the New York Mercantile Exchange as the dollar fell. A weaker dollar makes commodities less expensive to foreign buyers.

The Fed's decision on mortgage buying came as investors saw new evidence that housing remains weak. The Commerce Department said Tuesday that construction of homes fell 5.9 percent last month to a seasonally adjusted annual rate of 575,000 units. That was slightly better than the rate of 570,000 units economists polled by Thomson Reuters predicted.

January activity was revised higher to a pace of 622,000 units,the best showing in 14 months.

Applications for new permits fell to an annual rate of 612,000. Economists had forecast a drop to 610,000. Applications are considered a good sign of future housing activity.

Two stocks rose for every one that fell on the New York Stock Exchange, where volume came to 620.9 million shares compared with 426.2 million shares traded at the same point Monday.

The Russell 2000 index of smaller companies rose 1.03, or 0.2 percent, to 675.55.

Stocks rose in Europe after concern about Greece's financial woes ebbed. Britain's FTSE 100 rose 0.8 percent, Germany's DAX index rose 1.4 percent, and France's CAC-40 rose 1.5 percent. Japan's Nikkei stock average fell 0.3 percent.