Dow Rebounds Following Announcement By Fed
The Dow index closed up 429 points, rising to levels just below where it began on Monday, which saw a 634 point drop.
“The change in credit ratings is essentially trivial,” said Lawrence Harris, a professor of finance and business economics at the University of Southern California and former chief economist for the U.S. Securities and Exchange Commission. “It’s one ratings firm out of three. Nobody believes the U.S. government won’t pay its bills.”
Monday’s sudden drop is more likely indicative of investor’s fears of a new recession and the downgrade simply became a focal point, according to Harris.
“The interesting thing is that normally when credit ratings are downgraded bond prices drop, yesterday they rose,” said Harris. “That is a clear indication that nobody was worried about the U.S. not paying its bills.”
Tuesday’s rally followed the Federal Reserve’s announcement that it was downgrading its outlook for American economic growth following slower-than-projected growth this year, but would keep interest rates at their current low, a move (or lack of a move) that would keep interest rates for student loans and mortgages lower, and perhaps spur growth in the housing sector.
“The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate,” said the Fed in a press release.
The Federal Reserve announced that they would be maintaining the target rate for federal funds at 0 to .25 percent until at least 2013 “to promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate…”
A number of factors have contributed to slow economic growth in the United States, many of them beyond the control of American investors and the government.
The United States is not an economic island unto itself, and international events like the tsunami in Japan and economic troubles in the European Union impact the American economy.
The Fed also cites increasing energy costs and the rising price of food as factors retarding economic recovery.
However, not all of our economic woes can be blamed on external factors.
“People are also just very frustrated with the budget process,” said Harris. “This latest debate on the debt limit was very disturbing to a lot of people. The government had the opportunity to make some changes and they didn’t do it.”
In addition to announcing the decision to keep interest rates low, the Fed implied that it will not be implementing another round of Qualitative Easing, or the buying of Treasury bonds to push down interest rates, for the time being.
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