Stocks Pare Gains After Fed Warns of Rising Unemployment, Slow Growth

(CEP News) - U.S. stock markets halved their gains after FOMC members cast a growing shadow over prospects for a rebound in economic growth in the minutes of their most recent meeting.

Most recently, the S&P 500 was up 5 points to 821 after trading as high as 828 at midday. The Dow Jones industrial average was up 22 points to 7810 and the Nasdaq was up 22 points to 1583.

Market participants were looking forward to the minutes for comments and clues about the asset-purchase plans, but the Fed revealed little, so instead the focus moved to a downgrade of economic growth. The minutes were from the meetings on March 17-18.

Fed members lowered forecasts for GDP in the second half of 2009 and into 2010, and said they expect GDP "to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease."

The employment forecast was especially worrisome. The FOMC members said they see the "unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year."

The forecasts for inflation were also downwardly revised. Members said inflation could fall "below desirable levels" in the months ahead.

Earlier, a report suggesting life insurance firms will be eligible for TARP bailout funds led to a rise in stock prices. A Wall Street Journal source suggested the U.S. Treasury Department will announce the expansion of the TARP "within the next several days."

Optimism was also boosted by a merger of two large U.S. home builders. Pulte Homes launched a takeover of rival Centex Corp. in an all-stock deal worth $1.3 billion. The combined company will be the largest U.S. home builder by market cap.

The only notable U.S. economic data release was wholesale inventories, which fell 1.5% compared to expectations for a 0.7% decline. It was the sixth consecutive decline and the largest fall on record.

All data taken at 2:44 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca

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