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