Tags: Wall Street

Stocks Plunge after Fed Announces Stimulus Steps

Wednesday, 21 Sep 2011 04:15 PM

NEW YORK (AP) — Stocks have plunged after the Federal Reserve said it would buy long-term bonds to help the economy. Investors were expecting the Fed's move, but they doubted that it would have much of an impact.

The Dow Jones industrial average fell 283 points, or 2.5 percent, to close at 11,124. The Standard & Poor's 500 index fell 35, or 2.9 percent, to 1,166. The Nasdaq composite fell 52, or 2 percent, to 2,538.

The Fed said it would buy $400 billion in 6-year to 30-year Treasurys by June 2012 and sell the same amount of Treasurys maturing in 3 years or less. The move is designed to lower long-term interest rates -- like rates on consumer loans.

Twenty-three stocks fell for every one that rose on the New York Stock Exchange.

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The central bank met for two days to discuss what to do about the weakening economy. After the meeting, it said it would buy $400 billion in 6-year to 30-year Treasurys by June 2012. Over the same period, it planned to sell $400 billion of Treasurys maturing in 3 years or less. The Fed's hope is that those steps will drive down interest rates on long-term debt. That could lower rates on mortgages and other loans.

The central bank's policy has been dubbed "Operation Twist" because it is designed to "twist" long-term rates relative to shorter ones. It recalls a similar program in the early 1960s, when the twist was the rage on dance floors.

There were few, if any, surprises in the Fed's announcement. This is the third major bond-buying program by the Fed in less than three years. The market's reaction showed that investors are skeptical about this program's chances of turning the economy around.

"None of the enacted policies have done anything to spur this growth and I'm not sure the Fed can do (much)," said Michael Sansoterra, a portfolio manager at Silvant Capital Management.

But the drop in stocks wasn't investors' final verdict on the Fed move. It's common for stocks to change direction in the minutes, hours and days following an important Fed announcement, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.

"After Fed announcements there's usually an initial reaction, seconds after," said Detrick. "Then there's usually a reversal. It seems like the initial reaction is usually reversed the next day, because people take a closer look at what actually was said."

The Fed said in its statement announcing its plans that the economy has "significant downside risks." One of those risks is the volatility in financial markets around the world.

The International Monetary Fund said Wednesday the global financial system is in its most vulnerable state since the 2008 financial crisis. In a semi-annual report, the IMF said the risk to banks and financial markets has grown in recent months.

Investors may have thought that the Fed's ability to send long-term rates lower was limited.

"Let's face it: with a 10-year Treasury offering 1.90 percent, there's not a whole lot of room for there to be a major impact," said Mark Lamkin, the head of Lousiville, Ky.-based Lamkin Wealth Management. Lamkin said the Treasury market will most likely be driven more by economic weakness in Europe than the Fed's new program.

The yield on the 10-year Treasury was at 1.87 in late afternoon, down from 1.93 late Tuesday and matching a record low set earlier this month.

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