NEW YORK – The Fed spoke — and financial markets rallied.
The Dow Jones industrial average surged more than 429 points, its tenth-highest point gain in history and the biggest since March 2009. It was just one day after the Dow had its worst point decline since 2008.
The Federal Reserve pledged to keep its key interest rate at its record low of nearly zero through the middle of 2013. The central bank also said that it has discussed "the range of policy tools" it can use to spur the economy.
Bob Doll, chief equity strategist at BlackRock, said the Fed's decision to hold interest rates at a very low rate for two years is "unprecedented" and called it a kind of "backdoor quantitative easing." In June, the central bank finished a second round of buying Treasury securities, also known as quantitative easing, in hopes of boosting the economy.
"Markets are going to do what they would have done if the Fed went out and bought securities," Doll said. He said he expects investors will return to stocks after the broad sell-off of the least few weeks.
He expects stocks to continue to rally because a slow-growing U.S. economy won't harm corporate profits. As a whole, the companies in the Standard & Poor's 500 index reap more than half their revenue overseas. What's more, companies have already cut costs significantly, have hoarded cash and squeezed more production out of workers. Even as the U.S. economy has slowed, the S&P 500 as a whole was expected to earn record profits this year.
"Corporate America has demonstrated that it can generate good growth and profits despite a weaker U.S. economy," Doll said.
The Dow rose 429.92 points, or 4 percent, to 11,239.77. On Monday, the Dow plunged 634.76 points in the first trading day after Standard & Poor's downgraded the U.S. one notch from its top AAA credit rating to AA+.
The S&P 500 rose 53.07, or 4.7 percent, to 1,172.53. The Nasdaq composite index rose 124.83, or 5.3 percent, to 2,482.52.
The rally spread to overseas markets early Tuesday. Japan's benchmark Nikkei 225 index was up about 1.4 percent, while Hong Kong's Hang Seng index added 3 percent. Australia's benchmark S&P/ASX200 index rose 3 percent.
At first, U.S. markets reacted much differently to the Fed's statement. Stocks fell as much as 205 points after the Fed's 2:15 p.m. EDT statement.
Gold surged more than $50 per ounce to $1,774. The yield on the 10-year Treasury note briefly touched a record low of 2.03 percent, after closing Monday at 2.34 percent.
An hour later with less than 45 minutes until the market closed, stocks rallied, gold retreated off its high and the yield on the 10-year Treasury note quickly headed higher. It was at 2.26 percent late Tuesday. A bond's yield drops when its price rises.
Howard Silverblatt, senior index analyst at S&P, called it the "Big Ben turnaround," referring to Fed chair Ben Bernanke.
The industries that did best on Tuesday were the ones that fell the most on Monday. Financial stocks in the S&P 500 rose 8.2 percent after falling 10 percent Monday. Materials companies, which rely on a stronger global economy for their profits, rose 5.9 percent.
Only seven of the 500 stocks in the index had declines. All 30 stocks in the Dow rose. Bank of America Corp., which was down more than 20 percent Monday, rose 16.7 percent, the most of any stock in the Dow. Aluminum maker Alcoa Inc. was up 8 percent.
Technology company MEMC Electronic Materials Inc. led the S&P 500 higher, gaining 19.1 percent.
Boosting the stock market isn't one of the Fed's jobs, but that hasn't stopped investors from parsing every word of the statements made by the Fed and Bernanke.
The Fed's mandate is to keep prices stable and promote low unemployment, not boost stocks. But a stock dive after Fed comments has happened before. On June 3, the stock market suffered a late-day dive when Bernanke spoke at a conference. Investors said they were looking for a hint of new plans to spur economic growth. When that didn't come, all three major indexes sank.
After Bernanke outlined the plan for a second round of quantitative easing in August 2010, the S&P 500 index gained 28 percent over eight months. Investors pointed to that rebound as evidence that quantitative easing worked — and so did Bernanke. This sentiment led some people to believe that if stocks fall too far, the Fed would come to the rescue.
The Fed said in its statement Tuesday that it expects "a somewhat slower pace of recovery over coming quarters." It had said as recently as six weeks ago that temporary factors, such as the high price of gasoline this spring and Japan's March earthquake and tsunami, would end and the economy would grow at a faster pace in the second half of the year. But on Tuesday, the Fed said those factors were only part of the reason that the economy grew at its slowest pace in the first half of 2011 since the recession ended in June 2009. It now expects slower growth over the next two years.
Economists now believe there is a greater chance of a U.S. recession because the economy grew much more slowly in the first half of 2011 than previously thought. The manufacturing and services industries barely grew in July. The unemployment rate remains above 9 percent, despite the 154,000 jobs added in the private sector in July.
Economies across the globe are also struggling.
Worries are growing that Spain or Italy could become the next European country to be unable to repay its debt. High inflation in less-developed countries, which have been the world's main economic engine through the recovery, is another concern. China's inflation rose to a 37-month high in July.
Those economic concerns have pulled attention from stronger corporate earnings this spring.
Dish Network Corp. reported Tuesday that its second-quarter net income rose 30 percent to $334.8 million on stronger revenue. Among the 441 companies in the S&P 500 index that have already reported their second-quarter earnings, profits are up 12 percent from a year ago.
The housing market, though, remains weak. Homebuilder Beazer Homes USA Inc. said its loss widened last quarter after it closed on fewer homes.
Consolidated trading volume was heavy Tuesday, at 9.2 billion shares. Nearly 12 stocks rose for every one that fell on the New York Stock Exchange.
AP Business Writers Matthew Craft, Sarah DiLorenzo and David K. Randall contributed to this report.