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Economy & Business

Federal Reserve Refuses To Budge On Interest Rates Despite Market Highs

ARI SHAPIRO, HOST:

The major U.S. indexes closed at record highs today. That came after better-than-expected earnings from JPMorgan Chase and other companies. It wasn't supposed to happen this way. After the Brexit vote a few weeks ago, U.S. stock prices wiped out most of their gains for the year. Since then, investors have reassessed their views on the economy, as NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: Just a couple of weeks ago, the pessimism about the global economy was thick. It looked for a while like the European Union was beginning to unravel, and the U.S. jobs report for May turned out to be remarkably disappointing. The Federal Reserve, which had looked pretty likely to raise interest rates, no longer seemed inclined to do so. But Jim Paulsen, chief investment strategist at Wells Capital Management, says the mood has changed.

JIM PAULSEN: I think some of that's being alleviated now. People are getting a little more calm, and some are getting optimistic that economic recovery looks like it's going to continue. And if it is, then the bull market is likely to continue.

ZARROLI: Which is why the Dow Jones Industrial Average hit an all-time high of a little more than 18,500 today. Paulson says there's simply been a lot of good data lately, and it's persuaded nervous investors that the economy isn't heading off a cliff after all.

PAULSEN: If you look at the broad array of jobs numbers from record low unemployment insurance claims to still pretty good overall payroll and household numbers coming from the Labor Department to rising wages, it seems to suggest that not only the job market but the overall economy remains in OK shape.

ZARROLI: And what about Brexit, the surprise decision by the United Kingdom to abandon the European Union? The quick formation of a new British Cabinet and the naming of a prime minister has gone a long way toward appeasing the markets. There are still likely to be economic ramifications for the U.K. and Europe, but Liz Ann Sonders, chief investment strategist at Charles Schwab, says the damage to the U.S. economy is likely to be limited, at least for now.

LIZ ANN SONDERS: Trade between the U.S. and the U.K. accounts for less than half of 1 percent of U.S. GDP. So the math suggests that this is not likely to be a big hit.

ZARROLI: In the meantime, something pretty remarkable is happening in the bond markets. Usually when there's evidence that the economy is doing better than expected, interest rates start to rise, but that hasn't happened. John Canally, chief economic strategist at LPL Financial, says take for instance last Friday's much-better-than-expected unemployment report.

JOHN CANALLY: Normally when that happens, the Treasury bond yield spikes higher, but yet on Friday, bond yields moved lower. I've been doing this for 30 years, and that's the first time I've ever seen that happen.

ZARROLI: The reasons for that are complicated, and they say a lot about the interconnectedness of the global economy. Right now the central banks of countries such as Japan, Germany and Switzerland are actually selling bonds with negative interest rates. By keeping rates so low, central banks are hoping to encourage people to spend more.

So rather than lose money on negative interest bonds, investors are hunting for safe places to put their money. They're sending some of it into U.S. Treasury bills, which is why interest rates have been generally falling. And they're also putting it into stocks, and that's another reason why stock prices have been setting records this week. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.