The decline in interest rates on Treasury bonds was especially striking, because it reflected continuing demand for the securities even after Standard & Poor’s downgraded the U.S. credit rating on Friday, raising questions about whether the bonds were as safe a bet as investors had long assumed. Investors poured their money into Treasurys on Monday, the first trading day after the downgrade, essentially saying that U.S. bonds remain among the safest at a time when economic troubles are menacing economies on both sides of the Atlantic Ocean.
In Europe, efforts by the European Central Bank to contain the continent’s debt crisis made progress on Tuesday. For the second day in a row, the rates that Italy and Spain pay to borrow money fell. The ECB began buying debt of the two countries this week to keep them from succumbing to the same financial contagion that has infected Greece, Ireland and Portugal.
European stock exchanges were mostly up Tuesday, with the British market up 1.9 percent, the French up 1.6 percent, and the Italian up 0.5 percent. The exceptions were the German stock market, which was down 0.1 percent, and the Spanish, down 0.4 percent.
Asian markets opened higher early Wednesday. Japan’s blue-chip Nikkei-225 index ended its morning session up nearly 1.2 percent.
Investor uncertainty
The wild swings on stock and bond markets reflect investors’ uncertainty about the health and direction of the global economy. Each fragment of news has the potential to set off major movements as investors extrapolate about what the new information could mean for the economy.
The Fed statement, issued shortly after 2:15 p.m., included no major surprises. But it sparked a brief rise in stock prices, followed by a swift collapse, and then steep gains — all within half an hour.
“The market was being driven almost entirely by the Fed,” said Julia Coronado, chief North American economist for BNP Paribas. “There was a drop as people digested the statement, and then a rally as they concluded it means that the Fed is open to easing monetary policy more.”
Although Fed Chairman Ben S. Bernanke may have a hard time persuading the board to take more ambitious steps to boost the economy, the committee left the door open.
The panel “discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability,” the statement said. The panel will continue to assess the economic outlook “and is prepared to employ these tools as appropriate.”
The last round of quantitative easing, a $600 billion bond-buying program, ended in June. If the Fed’s grim prognosis for the economy is correct, this could increase pressure on the central bank to take new steps.
“The Fed is saying that we’re going to be either backtracking or making much less progress toward reducing unemployment than we thought before,” Coronado said. “That should mean they have a pretty strong bias toward more easing.”
Staff writer Cezary Podkul contributed to this report.
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