August 9, 2011 in Nation/World

Plunge pressures Fed

Little left in arsenal to salve stalled economy, plummeting markets
Kevin G. Hall and Greg Gordon McClatchy
 

WASHINGTON – All eyes will be on the Federal Reserve today as it meets to weigh what else it can possibly do to reverse Monday’s 600-plus point decline in the Dow and boost investor sentiment amid fears of Recession 2.0.

Along with central banks in Europe and Asia, the Fed had signaled over the weekend that it would intervene behind the scenes in currency markets if events warranted. But Monday’s global rout in financial markets – the worst since the economic crash of 2008 – appears to call for more dramatic action.

“After today, it’s a lot harder. They’re probably going to feel like they need to do something, but I don’t think they feel they’ve prepared markets to do much more,” said Vincent Reinhart, a former top economist at the Fed who is now a scholar at the American Enterprise Institute.

After steep sell-offs in Asia and Europe, the Dow Jones industrial average closed down 634.76 points – or 5.6 percent – at 10,809.85. Since July 21, the Dow has plunged 1,915 points, or 15 percent. The S&P 500 shed 79.92 points, almost 6.7 percent, to finish at 1,119.46. The Nasdaq plummeted 174.72 points, or 6.9 percent, to 2,357.69.

The dramatic declines, in the wake of Standard & Poor’s downgrade of its rating on U.S. credit, heightened pressure on President Barack Obama and politically polarized congressional leaders to take action to prevent a double-dip recession.

Stocks already were tumbling when Obama took to the airwaves Monday afternoon in a bid to calm markets, noting that investors “continue to believe our credit status is AAA.”

It was a reference to the fact that investors were piling into Treasury bonds as a haven amid the sell-off. But the president’s words appeared only to hasten the downturn. The Dow dived below 11,000 as he spoke and closed below that.

The global plunge was triggered not only by the S&P downgrade after markets closed Friday but also by signals from European leaders about addressing their mounting debt crises.

In one bright spot, even if it was also a vote of no confidence in the U.S. economy, crude oil prices on the New York Mercantile Exchange fell $5.57, or 6.4 percent, to settle at $81.31 a barrel for next-month delivery, perhaps giving motorists relief from soaring gas prices. That’s a stunning drop of about $17 from the $98 a barrel just a few weeks ago in late July.

The S&P 500 index is about 18 percent off its highs for the year. Most Wall Street analysts consider a 10 percent drop in stock prices a correction, and a 20 percent drop over the period of a few months as the start of a bear market. That’s one in which traders expect prices to fall back and negative sentiment to persist, keeping stocks falling gradually for months or years.

The Fed already has thrown everything but the kitchen sink at the economy since the crisis began in 2008, and with interest rates at zero, it has few tools left in its arsenal.

In June, it ended a controversial program of $600 billion in bond purchases that was designed to force investors to take risks. Called quantitative easing, or QE2, it involved the Fed purchasing bonds to drive down their return to investors, forcing them into riskier bets on stocks and other financial assets.

Any bump from that effort has been erased by this year’s steep slide in stock prices, and it’s unlikely that the Fed will go down that path again. At minimum, the Fed is expected to signal that it will keep the zero interest-rate policy it has had in effect since December 2008 in place for a longer period of time than markets have previously thought.


There are 40 comments on this story. Click here to view comments >>

Get stories like this in a free daily email