US Stocks Drop After Fed Announce ‘OPERATION TWIST’; DJIA Down 1.3% – WSJ.com
US Stocks Drop After Fed Announcement; DJIA Down 1.3%
SEPTEMBER 21, 2011, 3:45 P.M. ET
By Jonathan Cheng
U.S. stocks dropped as investors questioned the effectiveness of the Federal Reserve’s latest unconventional attempt to bolster the faltering U.S. economy.
The Dow Jones Industrial Average tumbled 148 points, or 1.3%, to 11260. The Standard & Poor’s 500-stock index shed 19 points, or 1.6%, to 1183 and the Nasdaq Composite lost 14 points, or 0.6%, to 2575.
The bulk of the declines came late in the trading day, after the Fed said it would increase its share of longer-term Treasurys by $400 billion by June 2012 in an effort to make credit cheaper and spur spending and investment.
The policy move, dubbed “Operation Twist,” effectively changes the composition of its securities portfolio so it holds more longer-term debt. To help keep mortgage rates low, the Fed also said it would reinvest the proceeds from maturing agency debt and mortgage-backed securities into mortgage-related debt.
While the market had largely expected the news, investors remained skeptical about the long-term effectiveness of the action to spur borrowing, hiring and spending. Underscoring the broad-based skepticism, three out of 10 voting officials opposed the action at the conclusion of a two-day meeting of the Fed’s policy making body — the Federal Open Market Committee — highlighting continued divisions within the central bank as it tries unorthodox new ways to provide support to the economy.
“The twist is like a popsicle when you have a sore throat — it makes you feel good but it doesn’t address the underlying disease, and the disease is confidence, not that liquidity is too expensive,” said Ron Florance, managing director of investing strategy and asset allocation for Wells Fargo Private Bank. “The Fed has been as accommodative as it can, and now it’s the other side of the balance sheet that needs to make a longer-term prudent fiscal policy…The super-committee on the budget is really the one that people are waiting for now.”