Markets go schizophrenic after announcement from the Fed

Traders watch the announcement that the US Federal Reserve Bank will leave interest rates "exceptionally low" until 2013 on the floor of the New York Stock Exchange on August 9, 2011 (AFP Photo / Stan Honda)
The Federal Reserve announced this afternoon that they would keep interest rates at a record low for another two years in an attempt to save the economy. Moments later, markets plummeted yet again.

By Wall Street's closing today, however, the markets saw an unexpected bounce-back, showing a soar of stocks by the most in two years.

A hopeful market was desperate for good news prior to this afternoon’s heartbreak, with many Wall Street figures assuming the Fed would announce a new round of quantitative easing bond-buying as a means of saving the faltering market. Earlier today, the European Central Bank announced that they would be doing that with certain euro zone bonds.

Instead, however, the Fed released a not-so-optimistic statement which led to yet another drop in the markets.

Following today’s announcement, the US financial markets dropped immediately before slightly going back to the positive side and then plummeting once more. At 2:42 p.m. EST today, the Dow Jones Industrial Average registered at only 10,627.34, its lowest point since October 2010. At close, however, the DJIA clocked in at 11,239.77.

On Monday, the Standard & Poor’s 500 Index showed its biggest decline in nearly three years.

The Fed is aware that this might not be the best sign, but they are trying to go easy with their words. The economy is growing “considerably slower” than they expected, they said today. The Fed had originally said it would keep low-interest rates in place for “an extended period” of time, but now intends on keeping it near zero until 2013.

In a statement issued by the Federal Open Market Committee, they write that, “Moreover, downside risks to the economic outlook have increased.”

"As expected, the FOMC joined the chorus of those recognizing that earlier views on growth were too optimistic," Avery Shenfeld, chief economist at CIBC World Markets, tells The Globe and Mail. Shenfeld adds that the US will try to rebound from the downturn that has ravaged the markets during the last two weeks, but added the America might still be “a bit too optimistic” of a recovery just get.

Other cringe-inducing sentiments found in the statement from FOMC today note the “deterioration in overall labor market conditions,” as well as the likely of “exceptionally low levels for the federal funds rate at least through mid-2013.”