The Dow Jones Industrial Average closed up 430.30 points, or 3.98 percent, at 11,240.15. The S&P 500 was up 53.18, or 4.75 percent; Nasdaq was up 124.83 percent, or 5.29 percent, in the best day for stock in two years. Markets opened higher, from bargain hunting, and S&P assurances to India over night, that their credit rating would not be challenged.
Markets then soared after the Federal Reserve Bank's, Federal Open Market Committee, FOMC, announced intentions to keep interest rates low for at least two years.
The Federal Reserve pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 in a bid to revive the flagging recovery after a worldwide stock rout.
The dollar weakened and the Swiss franc rose the most since at least 1971. ... The 10-year Treasury yield fell as much as 28 basis points to 2.03 percent before trimming its decrease and trading down six basis points at 2.26 percent. The Dollar Index slid 1 percent. ...
In pledging to keep its benchmark rate at an all-time low, the Fed also discussed a range of policy tools to bolster the economy, saying it is prepared to use them “as appropriate.” The statement fueled speculation the central bank may consider a third round of quantitative easing through bond purchases to revive a recovery that’s "considerably slower" than anticipated.
We've been hearing some speculation that some degree of quantitative easing may have been going on already, but I've seen no confirmation of this. I'm hoping some of our readers who may be experts on this may help improve our understanding of the difference, if any, between "quantative easing" where the Federal Reserve buys assets to pump liquidity into the system, and "just" keeping interest rates low? Is this not accomplished by the same mechanism?
If the Federal Reserve buys our own Treasury Bills, this should lower interest rates should it not? Perhaps, the extra distinction arises from controlling how many Treasury Bills the Federal Reserve decides to issue?
This makes sense, doesn't it. If we flood the market with T-Bills, interest rates would be lower in the short-term.
Overnight bank lending rates are another lever, the Federal Reserve has to influence interest rates. If none of our resident experts rescues us here, I will get out my old economics textbooks, and give a smarter report tomorrow. All Keynesian Kossacks should understand Federal Reserve operations better than I'm displaying here.
How ironic that after the US credit rating was reduced to AA+ last Friday, leading to expectation that our government would have to pay higher interest rates to borrow, the Treasury Bill rates have actually declined, as global investers vote with their feet, when the risk of a financial collapse confronts them.
U.S. stocks rebounded from a rout that wiped out $1 trillion yesterday in the first trading session after the government was stripped of its AAA rating at S&P. The S&P 500 sank 11 percent in the previous three days and started today trading at 12.3 times reported earnings, compared with its average of 16.4 since 1954, according to data compiled by Bloomberg. The MSCI All-Country World Index is valued at about 12 times profits, down from 21 in 1995, the data show.
While yesterday’s stock rout wiped out about $2.5 trillion in global equity values, extending total losses since July 26 to $7.9 trillion. ...
And, here we see another poignant irony. (Or, is it an ironic poignancy?).
In a clumsy effort to save $2 trillion over 10 years, the Teabaggers end us destroying $7.9 trillion of global market value?
I really hope, Majority Leader John Boehner has the decency to apologize to the American people, and the people of the world. Perhaps, if he, Cantor apoligized and promised, not to do this again, the S&P would restore our AAA credit rating, and we could move forward. And, someone could say, "one day, we''ll look back on this episode, and just laugh."
Yesterday, Moody’s Investors Service said the US will retain it's AAA rating, due to the dollars as the world'd reserve currency. Fitch also did not change it's rating, making the S&P change look ever more dubious.
Another, poignant observation, is that China was lecturing the US earlier in the week about our credit rting when our AA+ rating is still higher than theirs.
Last, night, after a free fall of 5% to 9% for a few hours, Asian markets turned around and recovered most of their losses.
Bargain hunters were already out last night, looking for oversold stocks based on their fundemental price/earnings ratios.
Let's hope this continues and we establish a secure and stable floor for global asset prices, restoring some confidence for consumers, business, and investors.
3:10 PM PT:
I felt guilty of my clumsy explanation of the Federal Open Market Committee, so here is a link to Wikipedia which does a much better jobs. http://en.wikipedia.org/...
There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:
The effective federal funds rate charted over more than fifty years.
The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The Federal Reserve System usually adjusts the federal funds rate target by 0.25% or 0.50% at a time.
Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system as necessary to balance the Federal Reserve's dual mandates. Open market operations are done through the sale and purchase of United States Treasury security, sometimes called "Treasury bills" or more informally "T-bills" or "Treasuries". The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these securities affects the federal funds rate, because primary dealers have accounts at depository institutions.
I hope this helps. I'll put a test in the poll.