Markets rally as Fed pledges to keep rates low for two years

The FTSE 100 climbed this morning and Asian and US markets rallied strongly overnight as the Federal Reserve announced it would hold interest rates at close to zero until 2013.

The S&P 500 closed 4.74% up at 1,172.53, while the Dow Jones ended the day 3.98% higher at 11,239.77.

The yield on the 10-year US treasury plunged to an all-time record low overnight after the Fed’s statement, down to 2.0346%, a move of more than 28 basis points. The initial drop in yield was the sharpest since the week of the collapse of Lehman Brothers.

Safe haven currency the Swiss franc also hit a fresh high.

Meanwhile, in Asia, Japan’s Nikkei closed 1.05% up at 8,038.74 while the Hang Seng climbed 2.8%.

The FTSE 100 leapt nearly 2% in early trading, climbing 1.85% or 97 points to 5,260.

Yesterday the FTSE 100 experienced a rollercoaster day of trading, moving positive at first and later diving into bear market territory, finally closing 95 points higher at 5,164.92.

At its nadir it hit 4,791.01, a 20.9% fall from its recent peak last month, meeting the criteria for a bear market.

Gold was trading at about $1,755 an ounce yesterday, down from $1,778 on Tuesday. US crude oil rose more than 2% to trade at $81.05 a barrel.

In a statement released yesterday following its Open Market Committee meeting, the Federal Reserve said the US was showing weaker than expected economic growth, a deterioration in labour market conditions, and limited consumer spending.

“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today to keep the target range for the federal funds rate at zero to 1/4%,” the FOMC said.

“The committee anticipates that economic conditions — including a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”