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Fed to keep interest rate near zero through mid-2013

August 9, 2011 12:00:00 AM PDT
The Federal Reserve announced on Tuesday that it will keep interest rates at record lows through at least mid-2013, an unprecedented step to halt the alarming decline of the stock market and economy.

Stocks rose at the closing of trading after the Fed announcement. The Dow Jones industrial average was closing up 429 points, or 4 percent, to 11,239.77, its tenth-highest gain ever. The S&P 500 was up 53, or 4.7 percent , to 1,172.53. The Nasdaq was up 124, or 5.3 percent, to 2,482.52.

"There is a definite undertone of significant economic concern from the Federal Reserve," said Greg McBride, an economist with Bankrate.com.

It has been at that record low since December 2008. The Fed had previously only said that it would keep it low for "an extended period."

The hope is that it could spur more spending by making it cheaper for consumers to borrow money. But some analysts say the current interest rate is already around 0 percent, so it's unlikely that will do anything to improve the economy.

The Dow fell 634 points on Monday, the sixth-largest drop in Wall Street history. For the average investor, that meant about $16,000 erased from their 401K plans.

Analysts say the drop was just a psychological reaction to the growing European debt crisis and negative fallout from last week's debt deal in the U.S.

Fed chairman Ben Bernanke did not speak publicly after Tuesday's meeting as he has before. But the two year time frame points to problems in the economy that won't soon go away.

Some economists believe there now is a greater chance the U.S. will slide into a recession again.

Manufacturing and services grew little in July. Though 154,000 jobs were added in the private sector, the national unemployment rate stayed just above 9 percent.

"The administration and Congress have to come together and reassure people we're going to get our budget problem under control. That will keep S&P happy. That will keep the world markets happy," said Dr. Gordon Klein, a lecturer at the UCLA Anderson School of Management.

"It doesn't have to be done instantly, it doesn't have to be done precipitously, but it does have to be done in a fashion that says to people we're serious about getting our budget problem under control," Klein added.

Experts say job creation, tax hikes and by the government would stimulate the economy.

"If you look at the 1990s in comparison, tax rates were higher, but business was booming. The unemployment rate was quite low and when (President Bill) Clinton left the White House, we actually had a budget surplus," said Brett Trueman, a professor at the Anderson School of Management.

Trueman said it's also up to consumers to help keep the economy afloat.

"If everyone's afraid, no one spends any money, then to economy is going to collapse," he said. "Keep spending money and the economy will maintain its footing."

The Associated Press contributed to this story.


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