MarketView for March 19

Summary

The major equity indexes were lower on Wednesday after comments from Federal Reserve Chair Janet Yellen raised the possibility of an earlier- than-anticipated increase in interest rates. Specifically, Fed Chair Janet Yellen said the "considerable period" between the end of its quantitative easing program, known as QE, and the first rate increase from the central bank could be six months.” and made it clear that the Fed would rely on a wide range of measures in deciding when to raise interest rates.

With QE forecast to wind down sometime near the end of the year, a six-month lag would move up the timetable for the Fed's first hike, which many market participants had been expecting in the second half of 2015.

The Fed also said it would cut its monthly purchases of Treasuries and mortgage-backed securities to $55 billion, from $65 billion.

The S&P 500 was within 1 percent of its record closing high, though economic bellwether FedEx hit a sour note in its outlook. Geopolitical concerns related to Ukraine also stayed in focus. FedEx posted results below expectations and gave a weak full-year profit forecast, but the company also said it had been significantly hurt by winter storms. Nonetheless, FedEx’s shares fell 0.1 percent to close at $138.38.

Equities had rallied to start the week, buoyed by easing geopolitical concerns, though trading volume has been light. The S&P 500 .SPX has climbed 1.7 percent over the previous two days, the best back-to-back performance for the benchmark index since early February.

First Solar chalked up a again of  20.6 percent to close at $69.40 and ranked as the S&P 500's best performer after the company forecast a rise of up to 21 percent in revenue this year. First Solar also said it was developing cost-effective solar plants with General Electric.

Volume was light, with about 6 billion shares changing hands on the major equity exchanges, a number that was below the 6.7 billion share average so far this month, according to data from BATS Global Markets.

Fed Takes a Stance

In its first meeting with Janet Yellen as chair, the Fed clarified on Wednesday a question that investors have been trying to determine: When it might start to raise short-term interest rates from record lows. Reaffirming its plan to keep short-term rates low to help support the economy, the Fed will no longer delineate a specific unemployment rate that might lead to higher short-term rates. The Fed said it will instead monitor "a wide range of information" on the job market, inflation and the economy before approving any rate increase.

The Fed also said it will cut its monthly long-term bond purchases by another $10 billion to $55 billion because it thinks the economy is strong enough to support further improvements in the job market.

One reason for dropping a threshold unemployment rate, as Yellen among others have pointed out, is that the rate can overstate the job market's health. In recent months, for example, the unemployment rate has fallen not so much because of robust hiring but because many people without a job have stopped looking for one. Once people stop looking for a job, they're no longer counted as unemployed, and the rate can fall as a result.

The Fed's previous statement had said it planned to keep short-term rates at record lows "well past" the time unemployment fell below 6.5 percent. The rate is now 6.7 percent. Several Fed officials had recently suggested scrapping the 6.5 percent threshold and instead describing more general changes in the job market and inflation that might trigger a rate increase.

More than five years ago, the Fed cut its benchmark short-term rate to a record low near zero, where it's remained since. The consensus seems to be that the Fed will keep its target for short-term rates near zero until mid to late 2015.

The Fed also updated its economic forecasts Wednesday, stating that it expects the economy to grow at a steady if modest pace in 2014 despite weather-related setbacks this winter. The Fed is forecasting growth of 2.8 percent to 3 percent this year, a bit lower than its December projection of between 2.8 percent and 3.2 percent.

The forecast suggests that the Fed will continue to pare its monthly bond purchases, which are intended to stimulate growth by keeping interest rates low. It is doing so despite challenges faced by both the economy and the financial markets as a result of a brutal winter that's depressed growth, in addition to growing fears about how Russia's aggression toward Ukraine might slow the global economy.

In its statement explaining its action, the Fed noted that economic activity had "slowed during the winter months," partly reflecting the brutal winter. The Fed's decision came on an 8-1 vote. Narayana Kocherlakota, president of the Fed's regional bank in Minneapolis, cast the dissenting vote. Kocherlakota felt the changes the Fed made to its guidance on future short-term rate increases had weakened its credibility in raising inflation to the Fed's target of 2 percent. Inflation is now running around 1 percent.

Trade Deficit at 14-Year Low

The Commerce Department reported Wednesday morning that our current account deficit portion of our trade accounts fell to a 14-year low during the fourth quarter as exports reached a record high. According to the Department, the current account, which measures the flow of goods, services and investments into and out of the country, had a deficit of only $81.1 billion, making it the smallest deficit since the third quarter of 1999.

It represented 1.9 percent of gross domestic product, the smallest share since the third quarter of 1997. That was down from 2.3 percent in the July-September period. For all of 2013, the current account deficit averaged 2.3 percent of GDP, the smallest since 1997.

Look for the deficit to narrow further as an inventory correction weighs on imports. A decline in petroleum imports as the United States ramps up domestic production is also seen helping the current account.

The shortfall on the current account has shrunk from a peak of 6.2 percent of GDP in the fourth quarter of 2005, in part because of a significant increase in the volume of oil exports. During the fourth quarter, exports of goods and services rose 2.5 percent to $785.2 billion, while imports rose only 0.7 percent. The surplus on income rose to $64.4 billion from $59.1 billion during the third quarter. Net unilateral transfers fell to $31.6 billion from $34.0 billion.