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Stocks Surge After Fed Decides to Keep Interest Rates Low

Citing recent trouble on Wall Street, anemic job growth, and lags in the housing economy, the Federal Reserve made public that it will keep interest rates at historically low levels until 2013. The new language marks a market-rallying policy shift for the central bank, which previously kept mum about when it would hike up interest rates.


In a ""statement"":http://www.denverpost.com/nationworld/ci_18646417?source=pkg, the Fed said that it had revised earlier expectations for an economic bump and now anticipates a ""slower pace of recovery"" over the next several quarters. The central bank said that it projected minimal job growth over the same period.

""Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected,"" a Fed statement read. ""Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.""

The announcement followed a Federal Open Market Committee meeting in which the Fed's decision-makers reportedly failed to reach a consensus on the interest rate dip. Fed Chairman Ben Bernanke led the way in a yea vote, joining six other central bank presidents from around the country. Fed bank presidents from Dallas, Minneapolis, and Philadelphia broke ranks in a rare nay vote, with the Fed's statement saying that the policymakers preferred to keep interest rates low for an indefinite extended period.


Reacting to the news, Treasury yields ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô which mortgage rates follow closely ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô fell, with two-year yields dropping to 0.157 percent and 10-year yield plummeting below 2008 levels to hit 2.033 percent, according to the _Wall Street Journal_.

The Dow Jones Industrial Average, still limping after a 612-point nosedive Monday, skyrocketed by 429 points, which media outlets said marked the tenth-highest gain in history for Wall Street. The Nasdaq followed by casting a 125-point vote of confidence.

The inspired jumps by stocks lifted boats for mortgage giants ""Bank of America"":https://www.bankofamerica.com/, ""JPMorgan Chase"":http://www.jpmorgan.com/pages/jpmorgan, and ""Wells Fargo"":https://www.wellsfargo.com/, which closed in negative territory last Thursday at 7.4 percent, 4.96 percent, and 5.71 percent, respectively.

Cresting on the Dow's 429-point good news, Bank of America jettisoned the 20-percent drop on Monday to close at a resounding 17 percent ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô the highest of any stock. JPMorgan and Wells Fargo followed suit, ending a day for good news on tides of 7 and 8 percent, respectively.

News services offered up mixed reactions from analysts and economists late Tuesday.

Mark Zandi, chief economist with ""Moody's Analytics"":http://www.moodysanalytics.com/, ascribed the Fed decision to nervousness about the economy. ""This is unprecedented for the Fed to indicate they are ready to keep rates low for two more years,"" ""ABC News"":http://abcnews.go.com/Business/wireStory?id=14265826 quotes Zandi as saying.

""CNN"":http://money.cnn.com/2011/08/09/news/economy/federal_reserve_meeting/index.htm?hpt=hp_t1 quoted ""Miami University"":http://www.miami.edu/ business professor Steve Wyatt as saying that ""[i]t surprised me that they boxed themselves into a corner that way"" by proposing an end to interest rate highs in 2013. ""It essentially tells markets that they don't see any hope that we will see a stronger economic recovery in the next two years.""

Speaking to _MReport_, Paul Dales, a senior U.S. economist with ""Capital Economics"":http://www.capitaleconomics.com/, says that ""the economic recovery isn't going to get that much stronger for a few years.""

He says mortgage rates will stay low despite recent debt downgrades for U.S. Treasuries, GSEs ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home and ""Freddie Mac"":http://www.freddiemac.com/, and 10 Federal Home Loan Banks.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.

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