Market Stutters After Fed Holds Line On Rates

A man walked past a billboard showing global stock indexes at the Taiwan Stock Exchange in Taipei as markets extended losses Tuesday. Sam Yeh/AFP/Getty Images

The Dow Jones industrial average fell into negative territory and then bounced back Tuesday, minutes after the Federal Reserve said it likely would keep interest rates at record lows for the next two years.

The Dow, up by more than 2 percent at noon, was down more than 60 points within minutes of the Fed announcement at 2:15 p.m. ET. It then began to seesaw between positive and negative territory.

The actions were the latest swings in a day that started with a rally that fizzled, followed by another surge that held until shortly before the Fed announcement. Still, the moves were a far cry from Monday, when the blue-chip index plummeted a dizzying 634 points — the worst single day since the 2008 collapse of Lehman Brothers.

The Fed’s action was noteworthy because it previously only said that it would keep rates low for “an extended period.”

Meanwhile, Asian markets Tuesday recouped some of their losses from the previous day in early trading, but then took another nose dive; Hong Kong’s Heng Seng index tumbled 5.7 percent and Japan’s Nikkei lost 1.7 percent. Europe fared better, with the FTSE 100 index of leading British shares up 0.2 percent while France’s CAC-40 rose 0.7 percent. Germany’s DAX shed 1.4 percent.

Investors have been spooked by fears over the consequences of the U.S. credit downgrade, Europe’s debt crisis and mounting expectations of a global recession.

Many on Wall Street were watching to see whether the Fed would take action Tuesday. One option for the Fed was to announce that it is considering another monetary stimulus, which would be its third in the last three years.

“They won’t do anything big, but they will use a lot of language in their statement to show that they’re concerned about the situation, that they understand the worries, that they’re ready to act,” Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, said before the Fed announcement.

Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected. Intensifying concerns were reports showing that the manufacturing and services industries barely grew in July, although job growth was better than economists expected last month.

Investors are also worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe’s 21-month-old debt crisis.

The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and in even higher borrowing costs for the two countries. The European Central Bank stepped in Monday and bought billions of euros worth of their bonds.

In the oil markets, worries over the state of the global economy continued to weigh on prices. The main benchmark rate was down $3 at $78.31 a barrel. Earlier it had fallen to $75.71, its lowest since September 2010.

Stock markets in the traditionally oil-dependent Middle East also fell Tuesday, including the benchmark index in OPEC powerhouse Saudi Arabia, the region’s largest economy. It dropped 3.6 percent by midday.


Material from The Associated Press was used in this report

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