Cautious trading on Wall Street prior to the two day meeting of the Federal Reserve, took a positive turn on Wednesday with major indexes rising early in the session, and rising further still in response to the news that the Federal Reserve considered the economy to be “leveling out” as opposed to the previous view that the decline in the economy had been slowing down, but declining nonetheless. The Fed further revealed that interest rates would remain unchanged at a rate of 0-0.25 percent, going on to warn that economic activity will most likely remain weak for some time.
Wednesday ended with the Dow Jones industrial average up 1.3 percent to 9,361.61, while the Standard & Poor’s 500 climbed 1.2 percent to 1,005.81 and the Nasdaq composite index rose 2.5 percent to 1,998.72. Financial markets took the lead, with the Fed noting that rescue measures in the financial sector will continue to “contribute to a gradual resumption of sustainable economic growth in a context of price stability.” Certainly, there is every indication that regulators are keeping a strict watch on financial institutions, particularly those that have been recipients of government assistance.
Following the so-called “stress tests” carried out on nineteen US banks in May this year, ten were granted additional funds with one of the provisos being that they had to review the aptitude of their management to handle risks presented by an economy in recession. Citigroup is one of those ten banks and it has been reported that, at the insistence of the Federal Deposit Insurance Corporation (FDIC) and other regulators, they have called in external consultants to assist in meeting this requirement. Citigroup is expected to present a plan of action regarding proposed changes in its management team and governance procedures by the time it reports third-quarter results in October.
The US Federal Reserve went on to point out that consumer spending remains “constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit”. The Fed confirmed that, over and above the $300 billion Treasury program, it will be pursuing its plan to buy up to $1.45 trillion of agency mortgage-backed securities, as well other agency debt by the end of this year.
