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Fed to keep interest rate near zero for 2 years

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WASHINGTON (AP) — The Federal Reserve offered super-low interest rates for two more years Tuesday — an unprecedented step to arrest an economic free fall that dragged down the stock market. Wall Street roared its approval and finished a wild day with a 429-point gain.

Federal Reserve headquarters, Washington. Photo: Dan Smith via Wikimedia Commons

The rally was remarkably fast — the Dow Jones industrial average was still down for the day with less than an hour of trading to go — and enough to erase two-thirds of its decline the day before.

The Fed set its target for interest rates near zero in 2008 as a response to the financial crisis that fall. Since then, it had said only that rates would stay low for an "extended period." On Tuesday, it said that would be at least through mid-2013.

But the Fed also said it expects the economy to stay weak for two more years, longer than the Fed had previously indicated. It has already been more than two years since the end of the Great Recession.

The central bank left open the possibility of a third round of bond purchases designed to hold interest rates down and push stock prices up. The second round, announced last year, sparked a 28 percent rally in the Dow through April 29.

It was an unusually volatile day of trading. The Dow was up about 200 points most of the morning. It was up about 100 when the Fed statement came out at 2:15 p.m. Within half an hour, the Dow was down more than 200.

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