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Investors bid stocks higher
on Greenspan’s comments
NEW YORK >> Wall Street welcomed a surprisingly forthright statement on interest rates from Federal Reserve Chairman Alan Greenspan yesterday, with investors sending stocks higher in acceptance of his tough stand on energy prices and inflation.
Greenspan said the Fed was prepared to abandon a gradual, measured series of rate hikes in favor of larger increases should higher oil prices trigger a more general rise in inflation.
While the prospect of larger and faster rate hikes unnerved Wall Street in the past -- and did so again in the early part of yesterday's session -- many investors were reassured by Greenspan's uncharacteristically straightforward comments, and noted that rate increases in response to a strong economy fit past patterns of bull markets.
"I think because this statement was so crystal clear and unambiguous, we aren't seeing the major selling that we saw in the past," said Hugh Johnson, chief investment officer at First Albany Corp. "He really hit this on the head, and there's no need to parse or interpret this. That makes it a lot easier for the markets to digest and account for."
The Dow Jones industrial average gained 41.44, or 0.4 percent, to 10,432.52.
Broader stock indicators edged higher after remaining low for most of the session. The Standard & Poor's 500 index rose 1.76, or 0.2 percent, to 1,142.18, and the Nasdaq composite index was up 2.91, or 0.1 percent, at 2,023.53.
The price of the Treasury's 10-year note closed down 1/32 point while its yield rose to 4.77 percent from 4.76 percent yesterday. Two-year Treasury notes fell 116 point and yielded 2.69 percent, up from 2.66 percent yesterday.
Speaking via satellite to a conference in London, Greenspan may have signaled that the Fed might raise rates by a half percentage point at the end of the month, instead of a quarter-point raise.
Although such a warning would have sent stocks skidding a month ago, Wall Street would now welcome a curb on inflation, given that oil prices are still near record-high levels. And analysts noted that even with a series of rate increases through the rest of the year, interest rates would still be low compared with past bull markets.
However, trading volume has been uncharacteristically light since mid-May, which historically has not boded well for bull markets. While some of the uncertainty has left Wall Street, particularly around interest rates, some investors may be refraining from further buying because of the possibility of a terrorist attack or another spike in oil prices.
Absent that, the economy remains strong and the Fed's rate increases are, for the most part, already factored into stock prices, analysts said.
"I think you absolutely have to like the way the markets are acting after Greenspan spooked us a little," said Jay Suskind, head trader at Ryan Beck & Co. "The only thing bothering me is the light volume. There's still not a lot of interest there, but since there's no real bad news, we can drift like this and even drift to the upside over the summer."
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