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Fed jolts Wall Street in bid to soothe nerves

A Federal Reserve promise to keep rates low for two years sends markets fluctuating before they end the day on a positive note.

August 10, 2011|By Walter Hamilton and Nathaniel Popper, Los Angeles Times
  • Brian H. Loo, center, Harrison Choi, left, Patrick Ahn, second from left, and Bret Barker right, work on the trading floor at TCW in downtown Los Angeles.
Brian H. Loo, center, Harrison Choi, left, Patrick Ahn, second from left,… (Katie Falkenberg/For The…)

Reporting from Los Angeles and New York — Bret Barker jumped on the phone moments after the Federal Reserve shocked Wall Street with its vow to keep interest rates low for two more years.

The bond trader at Los Angeles investment giant TCW Group wanted to know how the unexpected news was affecting bond values and rang up a Wall Street investment bank for a price quote on a $100-million Treasury bond trade.

"He gave me three or four different quotes in the 20 seconds I was on the phone," Barker said. "He said prices are all over the place."

The central bank did its best to soothe a jittery Wall Street on Tuesday, but the reaction on stock and bond trading floors from New York to Los Angeles was anything but calm. Financial markets zigzagged immediately after the Federal Reserve released its policy statement.

On the New York Stock Exchange trading floor at Broad and Wall streets in Lower Manhattan, brokers stood at their trading stations and craned their heads toward the nearest television or electronic ticker in the minutes leading up to the announcement at 11:15 a.m. PDT. "Sh's" swept across the floor as the news was about to hit.

"The market is so nervous, they're looking for any kind of direction they might be given," said Benedict Willis, a trader with Sunrise Securities.

The Dow Jones industrial average, which had been down as much as 205 points earlier in the session, bounced around until the bulls finally won. The blue-chip index ended the day up almost 430 points thanks to a vigorous rally in the final hour as investors scooped up stocks that had been thrashed in recent days.

But the closing price belied the dramatic initial gyrations and head-scratching as even veteran traders scrambled to make sense of the central bank's move.

Fed announcements normally are finely calibrated affairs with predictable investor reactions. But in a sign of the intense volatility that gripped the securities markets, stock prices toggled from positive to negative territory more than two dozen times in the hour after the Fed news.

The Dow gained 4% to finish at 11,239.77. The Standard & Poor's 500 index jumped 53.07 points, or 4.7%, to 1,172.53. The Nasdaq composite index rose 124.83 points, or 5.3%, to 2,482.52.

After the Fed announcement, crowds of floor brokers converged at trading stations and bought stocks up on the belief that guaranteed lower rates until mid-2013 would boost the broader economy.

"Take 'em Johnny!" shouted one trader at the Barclays Capital station as the Dow raced higher.

"Now they're buying," another trader answered.

The mood changed abruptly when the news hit a few minutes later that three of the Federal Reserve governors had dissented from the board's decision.

"Boos" rang out across the floor and the Dow flipped from green to red.

"We knew they have had dissenting views," Willis said. "At this particular time to see them come out, it was the shock to the market when we were hoping for a little more of a calming statement."

Yet moments later the mood turned again as the indexes shifted back to green as the initial anxiety wore off.

Traders focused their attention on the Fed's mention of other tools it could use to help the economy.

It wasn't definitive, but "it was enough to rally the market," said Alan Valdes, the head of trading for DME Securities.

Volatility was even high in the bond market, which is normally staid compared with the frenetic world of stock trading.

The 10-year T-note yield fell to 2.26% from 2.34% on Monday. At one point the yield fell as low as 2.10%. The five-year T-note sank to 0.99% from 1.08%.

"The reaction was crazy," said Laird Landmann, a TCW portfolio manager. "The market just did not know how to read this."

From its 16th-floor trading room in a sleek downtown Los Angeles high-rise, portfolio managers and traders held a special meeting Monday afternoon to prepare for the Fed announcement.

During the market's steep sell-off Monday, TCW bought beaten-down bonds of financial services companies and utilities, as well as junk bonds that had fallen in price as fears of a double-dip recession gathered force.

As the central bank's statement hit the wires, Barker, the firm's head of interest-rate trading, shouted the unexpected news across the 60-person trading room.

But the market's volatility in the aftermath of the Fed move largely kept Barker and his colleagues on the sidelines.

"It's too jumpy right now to do anything," he said.

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