The Federal Reserve didn't give Wall Street what it wanted on Tuesday. But stocks rallied anyway as the market hoped that someone -- either the government or a private entity -- will extend beleaguered insurance giant American International Group (AIG; -21.2%) a bridge loan of billions to prevent the company from going bankrupt.
The Dow Jones industrial average gained 153.32 points, or 1.4%, to finish at 11,070.83. The broader S&P 500 index added 11.27 points, or 0.94%, to end at 1,203.97. The tech-heavy Nasdaq composite index rose 28.38 points, or 1.3%, to close at 2,208.29, Trading was active and volatile, with indexes slumping in the immediate aftermath of the Fed decision and then heading sharply higher in the session's final hour.
Tuesday's market action followed a vicious sell-off on Monday, in which the Dow tumbled 504.48 points, or 4.42%, to end below the psychologically significant 11,000 level. The "500" sank 4.63% Monday, breaking below its July lows. The Nasdaq slumped 3.6% Monday.
Despite the expectation of some market players that the Fed would lower interest rates in response to the current crisis on Wall Street, the central bank stood pat at its policy meeting Tuesday. Policymakers seem equally worried about inflation and an economic slowdown.
Bonds fell in price Tuesday after the Fed decision. The dollar index was up. Gold was lower, as were crude oil futures. Global central banks were injecting funds into the banking system to keep credit markets functioning, according to S&P MarketScope. The Fed injected another $50 billion of funds into U.S. markets Tuesday.
In its post-meeting statement, the policy-setting Federal Open Market Committee said that keep it was keeping its target for the federal funds rate at 2%.
"Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending," said the FOMC.
The Fed said tight credit conditions, the ongoing housing contraction, and some slowing in export growth were likely to weigh on economic growth over the next few quarters.
But the central bank added that "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."
The Fed said that inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Fed expects inflation to moderate later this year and next year, but the outlook remains "highly uncertain".
The Fed concluded by saying that the downside risks to growth and the upside risks to inflation "are both of significant concern" to policymakers. "The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
"The Fed made clear that it is not yet willing to take chances with respect to inflation," wrote Tony Crescenzi, chief bond market strategist for Miller Tabak. "Nevertheless, the Fed did clearly lean toward the possibility of interest rate cuts with its opening remarks about financial markets and labor market conditions."
"The [Fed's] statement was more balanced than I expected, with no indication of future rate cuts," wrote S&P chief economist David Wyss in a note Tuesday. "There may still be some quantitative easing through an expanded credit line, but there is no indication of that in this statement."
On Tuesday, Wall Street was still feeling the aftershocks of a momentous weekend that featured Lehman Brothers' (LEH; -11.4%) bankruptcy filing and Bank of America's ( 2 3 Next Page