US stocks rise before Fed policy makers meet to debate rates

NEW YORK (BLOOMBERG) - U.S. stocks advanced as Federal Reserve policy makers head into a two-day meeting to decide whether to lift interest rates for the first time since 2006.

The Standard & Poor's 500 Index rose 0.2 per cent to 1,982.09 at 9:38 a.m. in New York, after surging 1.3 per cent Tuesday. The Dow Jones Industrial Average added 39.88 points, or 0.2 per cent, to 16,639.73. The Nasdaq Composite Index gained 0.1 per cent.

"Nobody's going to want to try to be a hero in front of that big meeting," said Matt Maley, an equity strategist at Miller Tabak & Co LLC in New York. "We did have a big move yesterday, but I think today could look like Monday again and move sideways."

Data today showed prices paid by American households declined in August as cheaper gasoline helped keep inflation below the objective of Fed policy makers. The consumer-price index dropped 0.1 per cent, the first decline since January. The so-called core measure, which strips out often-volatile fuel and food costs, rose 0.1 per cent for a second month.

A 15 per cent plunge in energy costs over the past 12 months and a rising dollar are acting as a brake on inflation that the Fed views as temporary. Central bankers will have to weigh restrained prices, uneasy financial markets and a resilient U.S. labor market as they consider raising rates.

Speculation has increased that the Fed will delay a rate increase as China ignited concern that its slowdown could weigh on global growth. While investors remain confident the central bank will raise borrowing costs this year, traders are pricing in a 30 per cent chance of action on Thursday, down from 48 per cent before China's currency devaluation last month. Odds of a move at the December meeting are about 62 per cent.

The Organisation for Economic Cooperation and Development said the Fed would be right to begin raising rates this week but it needs to signal its intentions to the rest of the world. "Do it now to remove uncertainty facing emerging markets, but communicate more clearly the nature of the more gradual path, that's the message," OECD Chief Economist Catherine Mann said in an interview in Paris.

Equities have been particularly volatile recently. While the Chicago Board Options Exchange Volatility Index through Tuesday had slipped 45 per cent from its high last month, it was still 41 per cent above its annual average. Even as stock swings whipsawed investors in the past weeks, the S&P 500 has rebounded 5.9 per cent since a low last month, closing yesterday at its highest level in more than two weeks. The gauge closed Tuesday down 3.9 per cent this year, and 7.2 per cent below its record set in May.

With the S&P 500 trading at 16.7 times its members' projected earnings, history shows that a Fed rate increase could be bad news for investors banking on a rebound in U.S. corporate earnings. Since World War II, profit growth has fallen by roughly half in the year after a Fed hike, data from Ned Davis Research Group show. Analysts predict S&P 500 earnings will be flat this year, before rising 9.7 per cent in 2016.