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Dow rallies as Fed promises more low interest rates

WASHINGTON — The Federal Reserve guaranteed super-low interest rates for two more years Tuesday — an unprecedented attempt to boost the economy — and Wall Street roared its approval with a 430-point gain.

The stock market rally was remarkably fast. The Dow Jones Industrial Average was still down for the day with less than an hour of trading to go.

Asian stock markets responded by jumping early today. Japan's Nikkei 225 index climbed 1.2 percent, and Hong Kong's Hang Seng jumped 3.1 percent. South Korea's Kospi, which at one point Tuesday plummeted nearly 10 percent, gained 1.3 percent.

The Fed set its target for interest rates near zero in 2008 as a response to the financial crisis that fall. Since then, it had said only that rates would stay low for an "extended period." On Tuesday, it guaranteed them until mid 2013.

But it was also a sign that the Fed expects the economy to stay weak for two more years, longer than the Fed previously had indicated. It already has been more than two years since the end of the Great Recession.

The central bank left open the possibility of a third round of bond purchases designed to hold interest rates down and push stock prices up. The second round, announced last year, led to an extended rally for the market.

In an unusually volatile day of trading, the Dow finished up 429.92 points, or about 4 percent. It closed at 11,239.77. The Standard & Poor's 500 index finished up 4.7 percent, and the Nasdaq finished up 5.3 percent.

The yield on the 10-year Treasury bond briefly hit a record low, 2.03 percent. Investors have bought government bonds, driving the yields down, even after S&P stripped the United States of its top-of-the-line credit rating last week.

Low interest rates for two more years could make the stock market a better bet because bonds will return less money. That appeared to be at least part of the reason stocks rallied so much after investors had a chance to digest the Fed's statement.

Some analysts also attributed the late-day rally to wording in the Fed's statement suggesting it might take further steps to stimulate the economy.

The stock rally came after 21/2 weeks of almost uninterrupted declines. Those were fueled first by uncertainty about the federal debt ceiling, then by concerns that the U.S. economy is headed for a new recession and about out-of-control European debt.

When it came late Friday, the downgrade only added anxiety. On Monday, the first day of trading after it was announced, the Dow fell 634 points. Even counting Tuesday's gains, the Dow is down 11.6 percent since July 21 — almost 1,500 points.

The Fed's announcement of a 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 everyone was as impressed as investors on Wall Street appeared to be. University of Oregon economist Timothy Duy called the move "weak medicine" and said he wanted to see the Fed commit to buying more Treasury bonds.

The Fed 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.

430

Points the Dow gained on Tuesday after losing 635 points on Monday.



Jeb Bush weighs in on economy

Former Florida Gov. Jeb Bush wades into the national economic debate with an opinion piece in today's Wall Street Journal, co-authored by Kevin Warsh, a former Federal Reserve governor. In the column, Bush and Warsh say budget cuts are essential, but "we will never cut our way to prosperity.'' They argue for a grand strategy of growth, and say, "The strategy is a threat to those who take refuge in our burdensome tax code, and it is a great source of encouragement to those who seek higher rates of return on physical and human capital. Hence, fundamental tax reform—dramatically lowering tax rates for individuals and companies while eliminating loopholes, deductions and credits—is critical to economic growth.'' For the full column at links.tampabay.com.

Dow rallies as Fed promises more low interest rates 08/09/11 [Last modified: Wednesday, August 10, 2011 12:07am]

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