Stocks fall after Fed decision to buy bonds
NEW YORK – After a day of anticipation, investors got the news from the Federal Reserve they were waiting for. They didn’t like it.Stocks fell after the Fed said it would buy long-term Treasurys and sell short-term ones to help the economy regain momentum. But the major stock indexes were fluctuating — a typical reaction to any big move by the Fed.By 3:15, the Dow Jones industrial average had fallen 79, or 0.7 percent, to 11,329. It was down as many as 157 points after the Fed announcement. The Standard & Poor’s 500 fell 11, or 0.9 percent, to 1,191. The Nasdaq composite rose 5, or 0.2 percent, to 2,596.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.—AP Business Writers Chip Cutter and David K. Randall contributed to this article.
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