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Stocks plummeted Thursday morning after the Federal Reserve indicated that the U.S. economic slump could last for years.
At 9:50 a.m. Eastern time, The Dow Jones industrial average fell 371 points, or 3.3 percent, to 10,753. The Standard & Poor’s 500 index fell 37, or 3.2 percent, to 1,129. The Nasdaq composite fell 81, or 3.2 percent, to 2,457.
On Wednesday afternoon, the Fed announced a portfolio rebalancing designed to drive down interest rates on long-term government debt. The move was largely expected, but stock markets began a late-day slide that carried over to overseas markets on Thursday.
Analysts say the news troubled investors for two reasons: the Fed’s statement offered a bleak assessment of the future of the U.S. economy, saying it sees “significant downside risks to the economic outlook” including volatility in overseas markets.
Secondly, the Fed also decided to purchase bonds that matured after 30 years, hoping to push down rates far into the future. That was at the far end of the bank’s expected range of Treasury purchases, and some investors think the bank might have maxed out its ability to have much of an impact on growth or interest rates.
Traders bought government debt instead of stocks, which are seen as comparatively risky. The yield on the 10-year Treasury hit a record low, falling to 1.77 percent from 1.86 late Wednesday. Yields fall when demand for Treasurys rises.
Materials and energy stocks led the market lower. Companies that rely on global demand for infrastructure and fuel tend to fall when the economy appears to be in trouble. Crude oil prices fell 5 percent to $81.06 per barrel.
The decline in stocks came even as the New York Stock Exchange stepped in ahead of the opening bell to smooth out morning trading. The exchange used “Rule 48,” a measure that limits the amount of information that’s released about stock trades. It’s designed to make trading easier and faster, and is only used on days when extreme volatility is expected. Dow futures had fallen nearly 300 points when NYSE invoked the rule.
The government reported Thursday that fewer people filed new claims for unemployment benefits last week. Still, the number of applications remains high, at 423,000. The U.S. jobs crisis is one of the major economic challenges cited in the Fed’s statement.
FedEx Corp. fell 9 percent after it said that it would earn less in 2012 than it had expected. The company is seen as something of an economic indicator since demand for the global shipper’s services tends to line up with how the economy is doing.
CarMax Inc. plunged 10.6 percent after the company reported that slowing customer traffic hurt its second-quarter profit.
The next big round of corporate earnings reports doesn’t start for several weeks, but many analysts expect big corporations won’t be able to sustain the strong profits they have had for the last few quarters.
Concern that Greece won’t be able to avoid defaulting on its debt has also fueled the market’s slide. Greeks clogged city traffic and shut down airports to protest the latest round tax hikes and spending cuts that the government is proposing.
Greece must make deep budget cuts to meet targets set by international lenders. The spending goals are a prerequisite for getting an $11 billion installment of the rescue package the country received in 2010. Without the funds, the country will run out of money to pay its bills by next month.
Investors worry that this is another sign Greece won’t qualify for bailout funds. A Greek default would have repercussions for larger European economies that are struggling with debt and could tighten lending in the global banking system. Many fear it could set off a chain reaction that would echo the credit crisis of 2008.