Fed to keep US rates low for 2 years, stocks jump

US Federal Reserve says economic growth weaker than expected but announcement on interest rates sparks stock market rebound.

By REUTERS
August 10, 2011 07:31
2 minute read.
Stock traders react to news on interest rates

Stock Traders 311. (photo credit: REUTERS)

WASHINGTON - The US Federal Reserve on Tuesday took the unprecedented step of promising to keep interest rates near zero for at least two more years and said it would consider further steps to help growth, sparking a rebound in stocks.

The Fed painted a gloomy picture, saying that US economic growth was proving considerably weaker than expected, inflation should remain contained for the foreseeable and unemployment, currently at 9.1 percent, would come down only gradually.

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An unusually divided central bank pledged to hold benchmark rates at rock-bottom lows until mid 2013, and opened the door to other tools to support growth. The announcement demonstrated just how long the central bank expects it will take before a flagging economy can gather significant momentum.

"The statement was extremely negative in its outlook on the economy," said Omer Esiner, chief markets analyst at Commonwealth Foreign Exchange in Washington.

"By pegging the extraordinarily low interest rates to a date in the distant future, the Fed has essentially said that they see the current level of weakness lasting far longer than previously expected."

Financial markets, hungry for support from the Fed after bruising losses the past eight days that wiped $3.8 trillion from global stock portfolios, were jolted by the news.

US stocks sank initially and then see-sawed wildly before a strong rally. The Dow ended up 4 percent at 429.92. Treasury yields sank with the 2-year note plunging to a record low of 0.1647 percent and the dollar sinking.

But there was doubt over how long the rally might last given the weak outlook. In a Reuters poll of primary dealers who trade directly with Fed, an increased number said they expected that the central bank will have to fire off another gun before long -- buying bonds to lower rates rates even further, known as quantitative easing.

The poll found that 37.5 percent now see the Fed resuming bond-buying within the next six months, compared with 27.5 perecent who had expected more QE within two years when they were polled last Friday.

"If they have to act, they will," said Alberto Bernal, head of emerging markets fixed-income research at Bulltick Capital Markets. "They didn't act today because they didn't want to send a specific message of panic."

The Fed said that three policmakers dissented, the biggest such rebellion since 1992, pointing to unusual uncertainty about the outlook and reticence within the Fed about the effectiveness of unconventional policy.


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