The US market closed up on Tuesday, ending a volatile session in which it reversed direction several times on the back of a statement by the Federal Reserve pledging two more years of near-zero interest rates.
AP - The Federal Reserve sketched a dim outlook for the U.S. economy Tuesday, suggesting it will remain weak for two more years. As a result, the Fed said it expects to keep its key interest rate near zero through mid-2013.
It’s the first time the Fed has pegged its “exceptionally low” rates to a specific date. The Fed had previously said only that it would keep its key rate at record lows for “an extended period.”
The Fed’s synopsis and its implications for the economy led to a wild afternoon of trading on Wall Street. Stocks plunged after the statement was released, but then shot up shortly after. The Dow Jones industrial average sank more than 176 points, then recovered its losses and closed up 429 points for the day.
Many investors sought the safety of long-term Treasurys. The yield on the 10-year Treasury note touched 2.03 percent – a record low.
The two-year time frame for any rate increase underscored a stark reality: A sluggish economy and painfully high unemployment have become chronic.
“The tone of the Fed’s statement is very downbeat. They are very nervous about the economy,” said Mark Zandi, chief economist at Moody’s Analytics. “This is unprecedented for the Fed to indicate they are ready to keep rates low for two more years.”
Not all were impressed. University of Oregon economist Timothy Duy called the move “weak medicine.”
Duy said he wanted to see the Fed commit to buying more Treasury bonds. Earlier this summer, the Fed ended a $600 billion Treasury bond-buying program. The bond purchases were intended to keep rates low to encourage spending and borrowing and lift stock prices.
The Fed did hold out the promise of further help down the road but did not spell out what else it might do.
The central bank’s decision was approved on a 7-3 vote with three Fed regional bank presidents who have been worried about inflation objecting. It was the first time since November 1992 that as many as three Fed members have dissented from a policy statement.
Dean Maki, chief U.S. economist at Barclays Capital, said the large number of dissents suggests that Bernanke would have trouble building consensus for another round of bond purchases.
“Nothing here says they’re not going to do (it),” Maki said. But “it does suggest that there is significant resistance on the committee.”
The Fed used significantly more downbeat language to describe current economic conditions. It said so far this year the economy has grown “considerably slower” than the Fed had expected and consumer spending “has flattened out.” It also said that temporary factors, such as high energy prices and the Japan crisis, only accounted for “some of the recent weakness” in economic activity.
The more explicit time frame on the Fed’s key interest rate is aimed at calming nervous investors. It offered them a clearer picture of how long they will be able to obtain ultra-cheap credit, and it was at least a year longer than many economists had expected.
Fed officials met against a backdrop of speculation that they would say or do something new to address a darkening economic picture. The stock market has plunged and government data have signaled a weaker economy in the four weeks since Chairman Ben Bernanke told Congress that the Fed was ready to act if conditions worsened.
The economy grew at an annual rate of just 0.8 percent in the first six months of the year. Consumers have cut spending for the first time in 20 months. Wages are barely rising. Manufacturing is growing only slightly. And service companies are expanding at the slowest pace in 17 months.
Major holders of US debt
Employers hired more in July than during the previous two months. But the number of jobs added was far fewer than needed to significantly dent the unemployment rate, now at 9.1 percent. The rate has exceeded 9 percent in all but two months since the recession officially ended in June 2009.
Fear that another recession is unavoidable, along with worries that Europe may be unable to contain its debt crisis, has rattled stock markets. The Dow Jones industrial average has lost nearly 15 percent of its value since July 21. On Monday, it fell 634 points - its worst day since 2008 and sixth-worst drop in history.
The tailspin on Wall Street was further fueled by Standard & Poor’s decision to downgrade long-term U.S. debt.
Bernanke didn’t speak publicly after Tuesday’s Fed meeting. The chairman this year made a historic change by scheduling news conferences after four of the Fed’s eight policy meetings each year, but Tuesday’s wasn’t one of them.
Later this month at the Fed’s annual retreat in Jackson Hole, Wyoming, Bernanke will likely address the weakening economy, the S&P downgrade and the market turmoil.
Date created : 2011-08-09