Here’s Why Markets Turned Confident

Stocks amassed more gains on Tuesday after two more economic reports were in the “Goldilocks” range.

Tuesday’s economic reports were closely scrutinized as the FOMC began its two-day monetary policy meeting, when it will decide on the fate of quantitative easing. Both the Consumer Price Index and the report on housing starts for May were strong enough to demonstrate that the economic recovery is continuing, yet they were not so strong as to convince the Federal Reserve that quantitative easing is no longer necessary. The reports were in the “Goldilocks” range, causing stocks to make another significant advance.

On the housing front, the U.S. Department of Commerce’s Census Bureau reported that May housing starts increased to a seasonally-adjusted annual rate of 914,000 compared with April’s revised rate of 856,000. Economists had been expecting an increase to 950,000 from April’s initial estimate of 853,000. The shortfall from the forecast could be used as a reason for the Fed to continue with its bond-buying program.

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The U.S. Department of Labor’s Bureau of Labor Statistics reported that the Consumer Price index increased by only 0.1 percent in May, despite economists’ expectations for a 0.2 percent rise. The reading for “core” CPI (excluding food and energy costs) indicated a 0.2 percent increase, consistent with economists’ expectations. The reduced inflationary pressure allows the Federal Reserve more room to extend its monetary easing efforts, without inflationary consequences (in the near future).

As was the case on Monday, the economic reports released on Tuesday had something for everyone, causing the major stock indices soar.