MarketView for September 18

Summary

With the exception of the Dow Jones Industrial Average, the major equity indexes ended the day slightly lower on Tuesday after FedEx reduced its earnings number and investors pulled back after last week's rally on central bank stimulus. Shares of FedEx Corp fell 3.1 percent to $86.55. Declining crude oil prices also weighed on the market for a second day, with the S&P 500 energy index down 0.7 percent, making it the day's largest decliner among the S&P's sectors.

The Standard & Poor's 500 is up 5.3 percent since the end of July. The benchmark index reached levels not seen in nearly five years last Friday, a day after the Federal Reserve's unveiling of its plan to undertake a third round of stimulus. The Fed's announcement followed the European Central Bank's statement that it would buy bonds to support struggling euro- zone economies.

The Dow Jones transportation average lost 1.1 percent. FedEx cut its profit forecast for its fiscal year 2013, saying that a weakening world economy had prompted customers to shift toward lower-priced shipping.

Estimates for the third-quarter S&P 500 companies' profits have fallen sharply in recent months, and earnings now are expected to decline 2.2 percent from a year ago, according to Thomson Reuters data. It would be the first such decline in three years.

Apple, which broke sales records with its new smartphone, provided some support to the market. Apple's stock set another all-time high at $702.33 before ending at $701.91, up 0.3 percent.

Weighing on the tech sector were shares of Advanced Micro Devices, which fell 9.7 percent to $3.62 a day after the company said its chief financial officer was leaving the struggling personal computer chipmaker.

Economic data, however, offered a fresh sign of momentum for the housing market. Homebuilder sentiment rose for the fifth month in a row in September to its highest level in over six years, the National Association of Home Builders said.

Volume was lower than average for a second straight day, with roughly 5.9 billion shares changing hands on the three major equity exchanges, compared with the year-to-date average daily closing volume of 6.5 billion shares. Many participants were out Monday and Tuesday for the observance of Rosh Hashana, the Jewish New Year.

The Fed Means Business

The Federal Reserve will not waver from its aggressive policy stance when one of its two bond-buying programs expires at year end, and it is prepared to do even more to get Americans back to work, two Fed officials said on Tuesday.

Last week the Fed launched a potentially massive policy-easing effort with no set end date, will closely watch the ailing labor market for meaningful signs of improvement, the Fed policymakers said. In response to lackluster economic growth that has not been enough to drive the unemployment rate down from levels above 8 percent, the Fed headed deeper into uncharted policy territory with a third round of quantitative easing, or QE3.

William Dudley, president of the New York Federal Reserve Bank, said the economy needed a "nudge in the right direction," while Charles Evans, head of the Chicago Fed, predicted the central bank will keep buying assets at its current $85 billion-per-month pace into the new year.

"If the economy is weaker, we'll do more" asset purchases, said Dudley, a close ally of Fed Chairman Ben Bernanke and a key barometer of the thinking inside the central bank. "If the economy is stronger and we see a substantial improvement in the outlook for the labor market sooner, we'll end up doing less."

Dudley went on to say, "If you're trying to get a car moving that is stuck in the mud, you don't stop pushing the moment the wheels start turning - you keep pushing until the car is rolling and is clearly free."

Last week the Fed said it plans to buy $40 billion every month in mortgage-backed securities until the labor market outlook improves substantially. The purchases come on top of an existing stimulus program in which the central bank buys about $45 billion a month in long-term Treasuries while selling the same amount of short-term Treasuries. That program, dubbed Operation Twist and designed to drive down long-term borrowing rates such as mortgages, runs through the end of 2012.

Evans, who has long advocated such aggressive action by the Fed, said he would be surprised if there is enough evidence by year-end to halt Treasury purchases altogether.

"Under those conditions, I would expect we would continue with something like an $85 billion base of purchases ... that's a benchmark to start from," he said.

Wall Street economists have been trying to pinpoint exactly what conditions would constitute a "substantial" improvement in the outlook for the labor market, which the Fed last week suggested would halt the new money-printing program.

Addressing this question, Dudley said the Fed will watch all corners of the labor market, including payroll growth, the number of Americans who have given up the hunt for work, the employment-to-population-ratio and job-finding rates, as well as the broader measure of unemployment.

At year end, further purchases of Treasuries will depend on an assessment of costs and benefits and on labor improvement, said Dudley, who as head of the important New York regional Fed bank has a permanent vote on Fed policy.

Ultimately, the Fed is looking for a stronger recovery alongside stable prices, said Dudley. "When that finally materializes, I'll view it as consistent with the result we are trying to achieve, and not a reason to pull back our policies prematurely," he said.

Fed policymakers broadly agree that unemployment is much too high; most also agree that inflation, which has hovered near the Fed's 2 percent target, is well under control. However, there continues to be deep rifts within the central bank over the best policy response.

Dallas Fed President Richard Fisher, a forceful opponent of further easing, said he would have dissented last week if he had a vote on the bank's policy-setting Federal Open Market Committee this year.

"I would argue that it is less impactful right now because you have other things inhibiting businesses from making decisions on capex and employment," Fisher told CNBC. "I don't think this program will have much efficacy."

James Bullard, president of the St. Louis Fed, expressed a similar sentiment. While he has been less skeptical than Fisher about the use of bond buys as a stimulus option, Bullard told Reuters he did not think the economic data sufficiently weak to warrant the latest round of monetary easing.

"I would have voted against it based on the timing. I didn't feel like we had a good enough case to make a major move at this juncture," said Bullard, who is not a voter this year on the Federal Open Market Committee.

"We should take a little bit more (of a) wait and see posture. I think that constellation of economic data doesn't really dictate the decision that we made."

Only one of the 12 Fed voting policymakers dissented against QE3, which came very close to a plan Evans has advocated for the past year: a vow to keep rates low until unemployment drops below 7 percent or inflation threatens to top 3 percent, and to buy bonds if progress on jobs is not fast enough.

"I am optimistic that we can achieve better outcomes through more monetary policy accommodation," Evans told a business breakfast sponsored by the Bank of Ann Arbor. "This is the time to act," he said, adding that asset purchases could begin to taper in 2014 if the labor market improves as he expects.

Evans cast the debate over monetary policy as one between optimists who believe further easing can deliver a stronger economy, and pessimists who say it will only spark inflation. Pessimists have warned for years about higher inflation, only to have their predictions fall short, he said.

Risks abound that could send the U.S. economy back into recession, he said, citing a potential global slowdown, spillover from Europe's sovereign debt crisis and the looming "fiscal cliff."

"We cannot be complacent and assume that the economy is not being damaged if no action is taken," Evans said.