Fed's interest-rate move wows Dow, but is also sign of plodding recovery
The Dow recovered almost 430 points Tuesday, after the Fed said it would keep short-term interest rates low until mid-2013. But the Fed's surprise move also points to expectations for slow recovery.
A television screen at the post of specialist Stephen Ruiz, left, displays the decision of the Federal Reserve, on the floor of the New York Stock Exchange Tuesday. The Federal Reserve said Tuesday that it will likely keep interest rates at record lows for the next two years after acknowledging that the economy is weaker than it had thought and faces increasing risks.
Richard Drew/AP
New York
In a sign the US economy faces stiff headwinds for at least the next two years, the Federal Reserve’s Open Market Committee, which sets short-term interest-rate policy, said Tuesday that it expects to maintain exceptionally low interest rates through the middle of 2013.
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Never in recent history has the Fed specified how long it intends to keep rates low. Apparently, Wall Street received the news with enthusiasm – the Dow Jones Industrial Average soared 429.92 points Tuesday, after dropping 634 points on Monday.
However, the Fed's announcement was accompanied by a somewhat dark assessment of the economy, which it describes as “slower than expected” and as having greater “downside risks” in the future.
The announcement is something of a two-edged sword. With short-term interest rates virtually guaranteed to remain close to zero for two years, companies know they don't need to worry anytime soon about the costs of borrowing. But the Fed, which has a mandate to keep the economy growing, is also sending a message to the unemployed: Don’t expect much improvement in the near future. And the Fed’s economic outlook means President Obama will be running for reelection during a time of very slow economic growth.
“The Fed is being honest about the economy,” says Eric Stein, a vice president at Eaton Vance, investment managers in Boston. “It is saying there is not much more it can be doing; it will take time and smart policy changes that focus on long-run competitiveness to turn the economy around.”
The Fed’s statement resulted in sharp volatility in the stock market. Immediately after the announcement at 2:15 p.m. EDT, the stock market dropped sharply, moving from the plus column to a loss of about 150 points on the Dow average. But by the close, the Dow not only had recovered, but had gained 429.62.points. The uptick marks a major turnaround from the 634-point loss on Monday, the first day of trading after Standard & Poor’s downgraded the credit rating of the United States from AAA to AA+.
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