Dow soars 429 points after Fed makes new pledge on rates
The Dow Jones industrial average surged Tuesday, ending a volatile session up nearly 430 points after the Federal Reserve pledged to keep short-term interest rates near zero for at least two more years.
The blue-chip index gyrated throughout the session as investors weighed the implications of the Fed's surprise move. But buyers flooded into battered stocks in the final hour.
The Dow closed up 429.92 points, or 4%, to 11,239.77, its biggest gain of the year.
The central bank's announcement after its midsummer meeting helped energize investors looking for any scrap of good news after a global rout in stocks since Standard & Poor’s downgraded the U.S. credit rating late last week. On Monday, the Dow fell a stunning 635 points, or 5.6%, its worst decline since the financial-system meltdown in 2008.
Many analysts said the market was primed to bounce after deep losses over the last two weeks on fears over the fading economic recovery.
What's more, some noted that the Fed's new pledge on interest rates came as policymakers downgraded their expectations for the economy in the short run. That could cause some investors to reconsider how smart it may be to stay in stocks for the time being.
The Fed said it “now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting.”
Also, the Fed's decision on rates drew dissents from three members of the policymaking committee, a sign of fracturing views within the central bank.
Still, the bulls had control late Tuesday. The Standard & Poor’s 500 soared 53.07 points, or 4.8%, to 1,172.53. The tech-heavy Nasdaq composite jumped 124.83 points, or 5.3%, to 2,482.52.
With Tuesday's rebound, the Dow is down 2.9% year to date, the S&P 500 is down 6.8% and Nasdaq is off 6.4%.
Some investors rushed to lock in yields on longer-term Treasury bonds after the Fed statement, with short rates now likely to remain at rock bottom "at least through mid-2013," according to the Fed.
In theory, if businesses and investors believe that short-term rates won't rise for at least two years, they would have more incentive to do something potentially more productive with their money than keep it in bank accounts earning nothing. That could include investing in longer-term Treasury, corporate and municipal bonds.
The 10-year T-note yield fell to 2.25% from 2.34% on Monday. At one point the yield fell as low as 2.10%. The five-year T-note sank to 0.99% from 1.08%.
-- Joe Bel Bruno and Tom Petruno
Photo: Traders in a stock options pit at the Chicago Board of Trade on Tuesday. Credit: Frank Polich / Reuters