Tuesday, August 09, 2011

Stocks bounce back (but for how long)

If it's true that the stock market and a roller-coaster have a lot in common, then you couldn't blame those investors who are losing their lunch.

After a more than 600-point drop yesterday, the Dow Jones soared almost 430 points today, which CNBC notes is its largest single-day gain in more than one year.

There were signs as early as last night that investors were ready to take advantage of the bargains that result from the stock market losing more than nine percent over the three trading days that ended Monday.

Then late today the Federal Reserve offered a hint that it was prepared to prop up the ailing economy by agreeing not to raise rates for at least two years, as the Financial Times notes.

Reuters provides additional details, noting

The Fed said U.S. economic growth was proving considerably weaker than expected, suggesting inflation, which has already moderated recently, will remain contained for the foreseeable future.

Three officials, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, voted against the decision to pledge rock-bottom interest rates until mid-2013.

It was the first triple dissent against a decision by the policy-setting Federal Open Market Committee since November 1992.

"The committee currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013," the Fed said.
Much as the debt deal worked out last week, the Fed's decision today ensures that it will not be a political tool that can be used by either party in next year's presidential election. In suggesting that it will be 2013 at the earliest before interest rates might increase, the Fed is committing itself to not come off as favoring either party.

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