Dow and Nasdaq Shoot Up Despite Dour Fed Prognosis

Gas prices are displayed in Hattiesburg, Miss., on Sunday night. (AP Photo/Rogelio V. Solis)

MANHATTAN (CN) — Investors received news with the potential for both good and bad Wednesday, though markets saw the glass as half full.

The Federal Reserve, which held a hearing on Wednesday, announced it would not change interest rates from their near-zero current level.

While investors expected the rate to stay the same, markets built on already-high gains after the announcement.

The Dow Jones Industrial Average gained about 100 points following the announcement and closed at 24,629 points, a 2.2% increase for the day. The Nasdaq shot up during the day, closing 3.5% higher than at the opening bell. 

In a statement, the Federal Reserve’s Open Markets Committee said to expect a very difficult second quarter of 2020 and a potentially difficult recovery later this year and in 2021.

“The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” the committee said in a statement. “The committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

After the meeting adjourned, Chairman Jerome Powell said the central bank is prepared to do more but that rates should stay where they are. “For now, we like our current policy stance,” Powell said during the webcast comments with journalists. “We are going to be very patient.”

Some investors had hoped for positive comments from Powell to further beef up markets and help prop up the U.S. dollar versus foreign currencies.

“If he laces his comments with optimism, the dollar could rally,” Kathy Lien, an analyst at BK Asset Management wrote in an investor’s note. “But if he suggests that the new social distancing measures will lead to a slower recovery, USD/JPY could head below 106.”

The dollar is currently worth nearly 107 Japanese yen.

Powell said to expect a significant increase in unemployment in the near-term and a prolonged downturn in the medium term, though it is unclear how long that might last. “The next phases are uncertain, highly uncertain,” Powell said. 

The Fed already lowered interest rates to near-zero in March to combat the economic fallout from the Covid-19 pandemic, while also buying corporate bonds and establishing a lending program for mid-sized businesses.

“We have a number of dimensions on which we can still provide support to the economy as you know our credit policies are not subject to specific dollar limit,” Powell said.

Investors also were relatively unfazed by a report earlier in the day by the Bureau of Economic Analysis, which found that the country’s gross domestic product fell by 4.8%, the largest drop since the Great Recession. 

According to the agency’s report, GDP had increased by 2.1% in the fourth quarter of last year. The report includes only estimates; more fulsome data is expected later this spring.

“The decline in first quarter GDP was, in part, due to the response to the spread of Covid-19, as governments issued ‘stay-at-home’ orders in March,” the bureau said. “This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending.”

Further good news could be gleaned from continuing corporate earnings reports. Apple, Amazon, Twitter and McDonald’s are all scheduled to release earnings reports for the first quarter of 2020 on Thursday. 

Also expected to release Q1 results on Thursday is pharmaceutical company Gilead, whose remdesivir drug has shown promise in treating coronavirus.

Preliminary results released Wednesday by the company showed at least half of patients treated with a five-day dose of the drug improved. Leaked results from a previous study indicated the drug had little to no effect on treating coronavirus.

Dr. Anthony Fauci, the U.S. government’s top expert on infectious diseases, said the study was “good news” in that it indicated a way to minimize recovery time. “This will be the standard of care,” Fauci told reporters.

The Food and Drug Administration reportedly wants to get the drug to infected patients as soon as possible, with potential news coming next week on an emergency use authorization for the drug.

About 3.1 million people worldwide have been confirmed infected by Covid-19, according to data from researchers at Johns Hopkins University, and more than 224,000 have died. In the United States, more than 1 million people have contracted the novel coronavirus and 60,000 have died.

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