The US Federal Reserve guaranteed super-low interest rates for two more years – an unprecedented step to arrest the alarming decline of the stock market and the economy.
Wall Street roared its approval and finished a wild day with a 429-point gain.
The rally was remarkably fast – the Dow Jones industrial average was still down for the day with less than an hour of trading to go – and enough to erase two-thirds of its decline the day before.
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 had previously indicated. It has already 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 stock market.
In an unusually volatile day of trading, the Dow finished up 429.92 points, or about 4 per cent. It closed at 11,239.77. The Standard & Poor’s 500 index finished up 4.7 per cent, and the Nasdaq finished up 5.3 per cent.
The yield on the 10-year Treasury bond briefly hit a record low, 2.03 per cent. 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.
The stock rally came after two and a half weeks of almost uninterrupted declines. Those were fuelled first by uncertainty about the federal debt ceiling, then by concerns that the US 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.
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.”
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 seven-three 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.
