After falling nearly a full percentage point in early morning trading, the Dow (INDEX: ^DJI ) rocketed back to close up 81 points (or 0.64%).
Why the change of heart, you ask? The Federal Reserve announced that it expects to be holding short-term interest rates near zero through 2014.
To be frank, it's a bit silly -- though not surprising -- that the market rallied on this news. No one expects us to be back near full employment by that time, and with the economy in a liquidity trap, core inflation won't be up, either. That means that the conditions requiring low interest rates will still be in place two years from now.
Cyclical Dow components like Caterpillar (NYSE: CAT ) and Alcoa (NYSE: AA ) rallied strongly on the news, as they are especially susceptible to economic conditions. With the Fed more publicly committed to low rates, growth prospects have improved.
Mortgage REITs, led by Chimera (NYSE: CIM ) and Annaly Capital (NYSE: NLY ) , also jumped. Low borrowing costs have juiced their interest-rate spreads -- and hence their yields -- making them popular among dividend-thirsty investors. But REIT investors and, to a lesser extent, banking investors might not want to get too excited about the news just yet. If the announcement is a sign the Fed is becoming increasingly concerned about unemployment (it also revised its GDP growth estimates downward), that increases the likelihood it might take further actions to boost economic growth, like another Operation Twist or QE. And those actions might involve driving long-term rates down further, something that definitely wouldn't help spreads.
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