NEW YORK The stock market had a half-hearted comeback Tuesday after the Federal Reserve announced it would take small steps to stimulate the economy.
The Dow Jones industrial average, down about 100 points before the Fed announced its plans, recovered to a loss of 54. The other major market indexes also bounced off of their lows. But investors were still cautious: The Dow was able to briefly show a gain but fell back again as traders recognized that the Feds moves, while welcome, would be small and wont cure the economys problems.
Losing stocks were ahead of advancers on the New York Stock Exchange by almost 3 to 1. And stocks considered safe bets in a weak economy, including health-care and consumer products companies, were among the gainers.
The Fed, in a statement issued after a one-day policy meeting, said it will use money from its investments in mortgage securities to buy government debt on a small scale. Because rates on bonds and other debt fall as their prices rise, the Feds purchases should help send long-term rates on mortgages and corporate debt slightly lower. And, the Fed hopes, stimulate lending to consumers and businesses.
News that the Fed would be buying government debt, and in the process reduce the supply of Treasury issues on the market, sent Treasurys higher. The yield on the governments 10-year note, which moves in the opposite direction from its price, fell to 2.75 percent from 2.82 percent before the announcement. The yield is used to help set rates on mortgages and other consumer loans.
Analysts said that while investors were hoping the Fed would take some steps to help the economy, the market recognizes the limitations of the central banks plans.
We had an hour or so of rally, but then it backed off a bit, said Dan Cook, Chicago-based senior market analyst with brokerage firm IG Markets. Traders realized its not a game changer. Its not going to pump up the market.
The purchases of debt the Fed plans are known as quantitative easing. Economists estimate that the Fed will have about $10 billion a month to buy the debt. That is a small amount of money compared to the economys needs.
The Fed had hoped to roll back its debt holdings as the economy improved, but that now looks unlikely.
In 2009 and early 2010, the Fed bought $1.25 trillion in mortgage securities, $175 billion in mortgage debt from Fannie Mae and Freddie Mac, and $300 billion in government debt. In March, the Fed stopped buying new mortgage securities and Fannie and Freddie debt because the economy was clearly recovering.
Some analysts said the Fed is moving slowly in its current stimulus plans so investors dont get the sense that the economy is more troubled than they have thought.
There is only so much the Fed can do, and right now it wanted to take baby steps in trying to provide additional liquidity without roiling the markets and scaring investors, Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn.
The Dow closed down 54.50, or 0.5 percent, at 10,644.25 after the Feds mid-afternoon statement. The Standard & Poors 500 index fell 6.73, or 0.6 percent, to 1,121.06. The Nasdaq composite index closed down 28.52, or 1.2 percent, at 2,277.17.
NYSE consolidated volume, which includes shares traded on other exchanges, came to a light 4 billion shares, up from 3.3 billion Monday. Volume has been light all summer because investors dont feel secure about the economy or the market. And the Feds move didnt change the consensus view.