The Fed announced that while it would not be coming to the rescue with some new program to stimulate the economy, it would leave interest rates unchanged for a couple of years.
That sent stocks tumbling — until traders figured out that locked-in interest rates and cheap credit could actually give the economy a more solid footing. Minutes after the 2:15 p.m. announcement, the Dow Jones industrial average sped downward 1.7 percent. But stocks soon made a U-turn and roared through the rest of trading. For the day, the Dow rose 429 points, or 3.98 percent, to close at 11,239.77. The broader Standard Poor’s 500-stock index rose 4.7 percent to 1,172.53.
It was the biggest daily gain in both indexes since March 2009, and followed the carnage of Monday’s 6.7 percent S. P. sell-off, the biggest loss since the height of the financial crisis in late 2008.
Following the initial disappointment in the Fed’s statement, the move seemed significant: after already cutting the short-term federal funds rate to virtually zero, the Fed was effectively telling investors it was now going to keep two-year bond rates close to zero as well.
As that interpretation spread through markets, investors realized it could provide a big stimulus to the economy and, with bond yields tumbling quickly as a result, encourage investors to hold stocks.
“It was quite a violent reaction,” said Ron Florance, the managing director for investment strategy at Wells Fargo Private Bank.
But it is uncertain whether the euphoria of the late trading on Tuesday will continue, or whether stocks will resume their steep decline of the past couple of weeks. “It’s always spurious to try to explain a single day’s move,” said Rob Sluymer, a technical analyst at RBC Capital Markets in New York.
Few believed that after the crazy sell-offs in recent sessions and the string of downbeat economic data, the Fed’s action on Tuesday meant the long-term problems of the economy were over.
“The big one out there is, there is still this concern that we could have this double-dip recession,” said Augustine Faucher, director of macroeconomics at Moody’s Analytics.
Still, many analysts pinned the rally to the fact that the Fed confirmed that near-zero rates are here to stay for another two years at least.
That had an immediate impact on the United States bond market. Two-year yields on Treasuries swung lower to a paltry 0.19 percent. They had been over 0.4 percent just a few days ago.
And yields on 10-year Treasuries, already falling in recent days on investors’ search for safety amid the global market turmoil, fell further, to 2.28 percent from 2.32 percent.
Those declines, analysts said, left investors with a stark question: Where else could you put your money to earn a decent return?
“For all their volatility as we have seen, there is now no other place except stocks,” said Todd Colvin, an interest rate strategist at MF Global.
Strange as it seems, wild swings like this — down sharply one day, up nearly as much the next day — are not all that unusual in times of economic uncertainty. Indeed, after the financial meltdown began in September 2008, there were 27 days by the end of the year when stocks rose or fell by 4 percent or more.
While 15 of those were down days, what most people forget is that 12 of those were up days.
Cumulatively, of course, the declines on the down days exceeded the gains on the up days, and stocks over all dropped 28 percent by the end of 2008.
On Tuesday, trading began on an optimistic note as the market rose ahead of the Fed’s meeting. But around 2:15 p.m., the phones went quiet on Wall Street trading floors as traders awaited the Fed’s decision.
Then, after an initial sharp drop, stocks rallied.
Floyd Norris, Julie Creswell and Bettina Wassener contributed reporting.
Article source: http://feeds.nytimes.com/click.phdo?i=d60abfae8ed010beb8291033af9bfc69
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