Stocks move higher after Fed stands pat
NEW YORK » Wall Street ended another tumultuous session with a sizable gain yesterday, partly recovering from its worst sell-off in years after the Federal Reserve said it was keeping interest rates steady. The central bank soothed fears of a worsening financial crisis even as the market waited to learn the fate of troubled insurer American International Group Inc.
In a statement accompanying its decision, the Fed noted the growing strains in the financial markets a day after the Dow Jones industrials plunged 504 points in reaction to continuing turmoil in the financial sector. The Fed also noted the ongoing weakening of the labor market. But it also sought to give some reassurance by saying it expected its policy moves to foster moderate economic growth over time.
The Fed has cut its target federal funds rate by 3.25 percentage points to its current level of 2 percent over the past year. Many on Wall Street expected the Fed to keep rates steady but there was some hope that the central bank would try to calm uneasy financial markets with a rate cut.
Still, the fact that the Fed didn't lower rates was a sign that it doesn't believe the economy needs that type of stimulus. It reiterated that it believed its moves to inject more liquidity into the banking system to help struggling financial institutions would help them, and in turn the economy overall.
"This was the right thing to do," said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. "I just don't think the Fed should be responding to the financial market crisis at this stage."
The Dow rose 141.51, or 1.30 percent, to 11,059.02, after falling about 100 points immediately after the Fed announcement. The Dow at turns rose and fell as much as 175 points in fractious trading. The Standard & Poor's 500 index rose 20.90, or 1.75 percent, to 1,213.60, and the Nasdaq composite index rose 27.99, or 1.28 percent, to 2,207.90. The Russell 2000 index of smaller companies rose 20.89, or 3.03 percent, to 710.65.
The yield on the benchmark 10-year Treasury note rose to 3.52 percent from 3.41 percent late Monday. The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude for October delivery fell $3.70 to settle at $92.01 a barrel on the New York Mercantile Exchange, bringing its two-day decline to $10.
Worries about AIG's well-being have intensified this week after several ratings agencies downgraded the company. Investors fear that a failure by the world's largest insurer would touch off a wave of financial turmoil.
But speculation that the company might be working out a loan from the government corralled some worries about the company and the stock finished well off its lows. The stock fell $1.01, or 21 percent, to $3.75 after trading as low as $1.25.