Stocks close up 430 after Fed vows low interest rates through mid-2013

The Federal Reserve on Tuesday said it planned to keep interest rates near zero through mid-2013, suggesting the central bank expects the economy to remain weak through the 2012 presidential election.

In a highly anticipated statement, the central bank’s Federal Open Market Committee (FOMC) said the economy was growing at a pace “considerably slower” than it expected, pointing to a struggling labor market and continued problems in housing.

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Encouraged by the promise of cheap cash, markets ended the day on a strong rally, with the Dow Jones Industrial Average rising 430 points. The Fed’s economic pessimism, however, does not bode well for President Obama, as it suggests the White House can expect to continue to fight stubbornly high unemployment and slow economic growth through the election year. 

In its statement, the FOMC painted a picture of an economy that is losing steam.

“Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed,” it said. Temporary factors, including the supply chain disruption from the tsunami in Japan, only accounted for “some of the recent weakness,” according to the statement. 



For the first time, the Fed said it would keep interest rates “exceptionally low” at least through the middle of 2013, suggesting a majority of committee members are not confident the economy could grow without interest rates near zero. 


Previously, the Fed had simply said low rates would be merited for “an extended period.” Three members of the Fed’s board dissented from the more explicit language, the highest level of dissent on the FOMC in nearly 20 years.

Beyond promising low rates, the Fed declined any further attempts to boost the economy. In particular, it was silent on a third round of “quantitative easing,” in which the central bank pumps money into banks by buying up securities with freshly printed money.

Federal Reserve Chairman Ben Bernanke opened the door to “QE3” in July, telling lawmakers the Fed was considering it as an option if the situation called for it. But on Tuesday, the Fed maintained it would “regularly review” its portfolio and “is prepared” to make changes if needed.


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A third round would surely be controversial, after Republican lawmakers blasted the Fed for its second effort, saying it was sowing the seeds of inflation and devaluing the dollar. Some lawmakers even went so far as to propose legislation altering the Fed’s mandate after the decision.

The market boost could provide a sigh of relief for policymakers, especially coming one day after a drop of over 600 points for the blue-chip stock index following the downgrade of the nation’s credit rating by Standard & Poor’s.

But the volatility of the markets suggest there could be more sleepless nights ahead. Before ending the day on a surge, markets had fallen precipitously after the Fed’s initial announcement. After a few oscillations, markets skyrocketed to the closing bell. 

Lawmakers thought they had put to rest much of the economic drama once they approved an eleventh-hour deal to raise the debt limit, freeing them to take a much-needed August recess.

However, Friday’s historic downgrade by S&P and continued turmoil in financial markets has kept up the spectacle, driving Obama on Monday to defend the nation’s financial reputation.

A number of lawmakers have begun suggesting that Obama should cut short Congress’s monthlong recess and get lawmakers back to work immediately.

“The president should call us back and … recognize that as important as reelections are in the House and the Senate, the integrity of our country is far more important,” Rep. Charles Rangel (D-N.Y.) said Tuesday in an MSNBC interview. Rep. Michele Bachmann (Minn.), a GOP presidential candidate, said she would call Congress back if she were president.

Republicans and Democrats are already jockeying for position when they return to work. House Majority Leader Eric Cantor (R-Va.) is pressing GOP members not to cave to pressure to raise taxes following the downgrade.

And liberal groups and lawmakers are pushing the administration to pursue more stimulus and avoid austerity. On Tuesday, representatives from MoveOn.org, Rebuild the Dream and the Center for Economic Policy and Research joined Rep. Jan Schakowsky (D-Ill.) in launching a “Contract for the American Dream.” The campaign pressures the administration to pursue increased spending and taxes to create jobs.

This story was posted at 2:37 p.m. and updated at 8:01 p.m.