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Stocks stanch the bleeding ahead of key Fed decision

Uncertainty behind declines in stock market
Uncertainty behind sharp declines in stock market 02:56

New York – Stocks edged up ahead of a key meeting by Federal Reserve officials. After dropping a total of more than 1,000 in the previous two trading sessions, the Dow added 83 points, while the S&P 500 and Nasdaq also saw modest gains. 

The Dow on Monday closed at its lowest level since October 2017 as investors fretted over signs of slowing economic growth, higher interest rates and global trade tensions. The blue-chip index jumped more than 300 points Tuesday before losing some of those gains to end the day up 0.3 percent at 23,676.

Investors are waiting to hear from the Fed, which is scheduled to release its latest monetary policy statement on Wednesday. Most economists expect it to raise short-term rates by another quarter of a percentage point, but investors – and President Donald Trump -- hope that it will signal a slower pace of increases ahead.

"Coupled with external political pressures and economic uncertainties, this may actually be one of the more consequential Fed meetings experienced in recent years," William Delwiche, an investment strategist at Baird, said in a client note. 

Mr. Trump renewed his criticism of the central bank Tuesday, urging Fed officials to read an op-ed in the Wall Street Journal calling for a pause in interest-rate hikes.

The Fed's rates help set borrowing costs for various types of loans. Higher rates can slow economic growth, something investors are already worrying about, and make stocks look relatively less attractive.

For now, most forecasters think policymakers will ignore Mr. Trump's grumbling and raise the federal funds rate a quarter point, which would be its fourth hike this year.

"From a bird's-eye perspective, the argument  for continued steady Fed rate hikes is clear," Ian Shepherdson, chief economist with Pantheon Macroeconomics. "The unemployment rate is 3.7 percent and falling, pointing clearly to sustained upward pressure on the pace of wage gains, while real short rates right now are zero."

Trade headwinds

Markets have slumped on growing concerns about slowing U.S. and global economic growth amid rising interest rates and trade tensions between the U.S. and China. JJ Kinahan, chief markets strategist for TD Ameritrade, said investors are confused about the state of the trade dispute and are reluctant to commit to stocks, while businesses aren't spending.

March 1 a "hard deadline" for trade deal with China, Lighthizer says 09:54

"We don't know the rules of the game," he said. "People can't plan. When you can't plan, you're not anxious to buy stocks."

Crude oil has plunged by more than one-third since early October as traders worried about a slowdown in the global economy and an increase in supply. Both would hurt prices.    

Despite such concerns, many market watchers say the economy remains in good shape and is unlikely to enter a recession anytime soon, citing healthy levels of consumer spending and robust corporate profits. 

Kathy Bostjancic of Oxford Economics thinks investor fears about slowing growth are "overdone. But she warns that a serious market slump could erode business and consumer confidence, which would hit spending. 

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