Investors seemed uncertain about what to make of the announcement by the Fed’s main policymaking board, which for the first time set a firm date for maintaining its near-zero target for short-term interest rates. This move could provide businesses and consumers with greater certainty about the availability of low-cost borrowing as they consider making investments or major purchases, such as homes or autos.
At the same time, the Fed declined to make any significant new efforts to bolster the nation’s flagging recovery. A rare dissent by three of the policy committee members to the interest rate decision signaled that it could prove hard for the central bank to take more dramatic steps in the coming months to lift the economy and prop up the financial system.
Wall Street investors and others had been especially interested to see whether the Fed would embark on a new round of massive bond purchases aimed at invigorating the economy. Although the Fed has carried out two rounds of “quantitative easing,” or QE, central bank leaders remain reluctant to pump hundreds of billions of dollars more into the economy, because they are skeptical about whether doing so would have much effect and worry that it could spark inflation.
The Fed board, however, was quite frank about its fears for the recovery, acknowledging that “economic growth so far this year has been considerably slower” than the committee had expected and that threats to the economy have mounted.
In the past few weeks, new economic indicators have shown that growth was much weaker in the first half of the year than previously thought, that job creation has been soft in the past few months, and that the manufacturing sector is slowing. The U.S. economy appears at greater risk of falling back into recession.
“Indicators suggest a deterioration in overall labor market conditions in recent months,” said a statement by the Federal Open Market Committee. “Household spending has flattened out, investment in nonresidential structures is still weak and the housing sector remains depressed.”
Those discouraging indicators, coupled with growing anxiety about a spreading debt crisis in Europe, contributed to a string of stock market losses. The Dow fell by more than 9 percent in the three trading days before Tuesday.
Investors ultimately cheered what they heard from the central bank.
“It is giving people a whole lot of clarity as to what the Fed is going to do,” said Michael Skordeles, chief market strategist at Morgan Keegan.
Even the modest step of promising to keep very low interest rates in place through summer 2013 provoked sharp disagreement on the board. The three dissenting votes were the most since 1992. Richard W. Fisher, Narayana Kocherlakota and Charles Plosser, presidents of the Federal Reserve banks in Dallas, Minneapolis and Philadelphia, respectively, preferred not to put a specific time on the low-rate plans.