Now that the economy has mostly recovered from the recession, an increasing number of policymakers believe it’s time for the Fed to start raising interest rates starting next year. The question is when.
“We know higher interest rates are coming, but we don’t know exactly when, whether it’s 2015 or 2016,” said Tom di Galoma, head of fixed income rates at ED&F MAN Capital Markets.
Investors always keep a close eye on the Fed, but they’re particularly sensitive these days because the central bank is in the process of winding down its economic stimulus policies. Investors worry that the bank might act too quickly and choke off the economic recovery.
The Dow soared 192 points on Feb. 11 after Janet Yellen, in her first public comments since taking over as head of the Fed from Ben Bernanke, said she would continue the Fed’s market-friendly, low-interest rate policies.
Confident that interest rates and inflation would remain low, investors bought bonds Wednesday, particularly bonds that have shorter maturities. The yield on the two-year Treasury note dropped to 0.36 percent from 0.39 percent late Tuesday, a relatively big move for that security. Yields on the three-year and five-year notes made similar moves.
Investors also got a dose of good news from Corporate America.
Aluminum giant Alcoa reported an adjusted first-quarter profit that was well ahead of analysts’ forecasts. The aluminum maker is typically the first large U.S. corporation to report its results every quarter. Alcoa rose 47 cents, or 4 percent, to $13.
Alcoa’s results helped push other mining and materials stocks higher. U.S. Steel rose 3 percent; industrial parts company W.W. Grainger climbed 2 percent and the auto parts company Delphi increased 3 percent.
Investors expect that corporate earnings for the first three months of the year will be held back by the severe winter weather that plagued most of the country. Earnings are expected to fall 1.6 percent from a year earlier, according to financial data provider FactSet. If that forecast proves correct, it would be the first time corporate profits have fallen since the third quarter of 2012.