Stocks plunge, bonds soar after Fed unveils plan to boost economy
Wall Street sent stocks sharply lower and bond prices surging after the Federal Reserve unveiled its latest plan to boost the ailing U.S. economy.
The central bank announced it would boost investments in longer-term Treasury bonds by $400 billion over the next nine months, a move designed to increase spending by consumers and businesses by making credit cheaper. Investors have poured into the Treasury market in recent days on anticipation of the plan.
However, stock investors questioned whether the Fed action — known on Wall Street as Operation Twist — would have a meaningful effect on the economy. The Dow Jones industrial average sank 283.82 points, or 2.5%, to 11,124.84. The Standard & Poor’s 500 index fell even more, losing 35.22 points, or 2.9%, to 1,166.76. It was the market’s biggest setback in a month.
“Putting salt on undercooked chicken isn’t going to make it a meal,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.
Many investors were also spooked by the central bank’s downbeat analysis of current conditions. The Fed said there were “significant downside risks to the economic outlook.”
While stocks sank, prices on longer-term debt soared, sending yields sharply lower. The yield on the 30-year Treasury bond dropped to its lowest point since early 2009, falling to 3.00% from 3.20% on Tuesday. The yield on the 10-year Treasury, a benchmark that influences mortgage rates, declined to 1.86% from 1.94%.
Operation Twist is the Fed’s latest bid to spur the stubbornly weak economy by in effect lowering interest rates. The Fed also said it would use the proceeds from maturing securities in its $885-billion mortgage-backed-bond portfolio to buy more of the same. Until now, the Fed has been using those proceeds to buy Treasury bonds.
