MarketView for March 16

Summary 

Wall Street closed on a positive note on Tuesday after the Federal Reserve held benchmark rates near zero and maintained its pledge to keep them low for an extended period. The central bank also pointed to increased momentum in the economy's recover. The end result was that  the S&P 500 hit a 17-month high.

Intel ranked among the top performers within the 30 companies making up the Dow Jones industrial average, ending the day up 4 percent at $22.01. There is some ongoing speculation on the Street that the company will release positive guidance for the current quarter.

General Electric closed up 4.5 percent to $18.07 after the Dow component's chief financial officer said he expects the company's earnings and dividend to rise in 2011.

The S&P 500 was able to puncture 1,150, a mark it had been unable to hold above in two previous attempts, and what technicians have cited as being a significant obstacle to additional gains.

During the morning, the markets were turning in positive numbers after Standard & Poor's ended its review for a downgrade of Greece, saying the government's recent deficit-reduction measures are supportive of the ratings. Concerns about Greek debt have been a drag on equities in recent weeks.

Data on Tuesday showed U.S. housing starts fell last month as winter storms clearly disrupted home building, while a drop in import prices pointed to muted inflation pressures.

Fed Statement Is As Expected

As was generally expected, the Federal Reserve renewed its pledge on Tuesday to keep interest rates near zero for an "extended period" even as it sounded more upbeat about jobs. The Fed's nod to a firmer job market after the deepest recession in decades offered a hint it may be moving closer to dropping its promise to hold borrowing costs at rock bottom levels.

However, it reintroduced a note of caution about the housing sector and repeated its view the economy's recovery would likely be moderate for a time. It also said inflation was likely to remain subdued as it held interbank overnight rates in a zero to 0.25 percent range. Following the decision, most of the large banks that deal directly with the Fed forecast a rate hike by year end.

"The committee ... continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the central bank said in a statement.

For a second consecutive meeting, Kansas City Federal Reserve Bank President Thomas Hoenig dissented, saying the commitment to keep rates exceptionally low for an extended period was no longer warranted.

The Fed said the labor market was "stabilizing," a more optimistic view than expressed after its last meeting in late January, when the policy-setting committee said only that deterioration in the labor market was "abating."

The central bank also said business spending on equipment and software had risen "significantly," also a brighter assessment than the one offered in January. It reiterated the point that it intends to wrap up purchases of mortgage-related assets by the end of March, but said it would monitor the economic outlook and financial developments to see if more support is necessary.

As those purchases come to a close, officials voiced heightened concern about the very sector they were meant to assist, saying that new homebuilding activity was "flat at a depressed level." Interest rates futures markets pared back the implied prospects that the Fed would raise the federal funds rate to 0.5 percent by its meeting in early November to 76 percent from 87 percent before the central bank's decision was announced.

The Fed has held the benchmark federal funds rate near zero since December 2008 to bolster the economy and help it through the most severe financial crisis in generations. Last March, it committed to holding rates very low for "an extended period."

The economy resumed growth in the second half of last year, and expanded at a robust 5.9 percent annual clip in the final three months of 2009.

Although the unemployment rate held at a lofty 9.7 percent in February as the economy shed 36,000 jobs, some of the lost jobs were pinned on blizzards that hit much of the nation. Many economists expect payroll growth as early as March.

Gains in manufacturing activity and retail sales have added to evidence the recovery is gaining traction.

The Fed has allowed special lending facilities to close as financial markets have returned to normal after the crisis, and it recently raised the discount rate it charges banks for emergency loans to 0.75 percent from 0.5 percent.

Fed officials stressed the move was in keeping with the settling of financial markets and was not a precursor to efforts to tighten lending conditions.

However, policymakers have begun to spell out steps they anticipate taking to move away from their easy money policies when the recovery gains steam. Look for the Fed to begin by pulling back some of more than $1 trillion it pumped into the economy during the crisis before it begins raising rates.

Weather Hurts Housing Starts

Housing starts fell 5.9 percent to a seasonally adjusted annual rate of 575,000 units last month disrupted by winter weather. Furthermore, a decrease in building permits suggests that the weakness would linger. Though the data on Tuesday was an indication home building would clip economic growth in the first quarter, it was not as weak as had been expected and groundbreaking for housing in January was revised significantly higher.

Groundbreaking activity fell reversing the prior month's gain, the Commerce Department said. Markets had expected housing starts to fall to 570,000 units. New building permits, which give a sense of future home construction, fell 1.6 percent to a 612,000-unit pace last month, dropping for a second straight month. Investment in new home construction made a small contribution to fourth quarter gross domestic product.

Actions varying from enactment of a government tax credit for first-time buyers, purchases of mortgage-backed securities by the Fed and private loan modifications have supported home sales and slowed the decline in prices.

Even without the weather-related disruptions, the housing market's recovery from a three-year slump is showing signs of hesitation. Home-builder sentiment slipped this month on worries over lack of credit for new projects and a wave of distressed properties hitting the market. Such properties typically sell below value and could crowd out the market for new homes.

The government revised January's housing starts upward to 611,000 units from the previously reported 591,000. Compared to February last year, starts were up 0.2 percent.

Groundbreaking for single-family homes fell 0.6 percent last month to an annual rate of 499,000 units in January. Starts for the volatile multifamily segment fell 30.3 percent to a 76,000-unit annual pace. With home sales weakening in recent months, new home construction is no longer running below sales, a factor that had helped to lower the supply of homes on the market over the last two years. There are also concerns that the winding up of purchases of mortgage-backed securities by the Fed at the end of this month could push up home loan rates.