Stocks surged Tuesday as Federal Reserve policymakers announced that they would keep the target range for the federal funds rate at 0% to 0.25%, and that they planned to keep rates in a very low range for the next two years.
“The Committee currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013,” the Federal Open Market Committee (FOMC) said in its announcement.
Immediately after the FOMC announcement at 2:15 p.m., the Dow Jones industrial average dropped to a low of 10,600 but recovered in late-afternoon trading to close at 11,239, up 429.92 points, or 3.98% higher. The Dow on Monday fell 634 points, or 5.6%. The S&P 500 surged 4.74% and the Nasdaq jumped 5.29%, erasing most of both indexes losses from Monday.
Seven of the 10 FOMC members, including Fed Chairman Ben Bernanke, voted in favor of the announcement. However, three members—Richard Fisher, Narayana Kocherlakota and Charles Plosser—voted against the action, saying they would have preferred using the same language used in the prior FOMC announcement on June 22. The prior statement didn’t name a specific period or year for maintaining rate policy at its current historic low.
The June 22 announcement said that the FOMC continues to anticipate that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”