Upon release of an upbeat statement from the Federal Reserve’s Open Market Committee, equity indexes jumped up to 11-month highs and the dollar weakened, but an hour later the dollar recovered and sent stocks plummeting. 

The S&P 500 hit an intra-day high of 1,079.89 but by the close it had dived nearly 20 points from that peak to 1,1060. That puts it down a full percentage point for the day ― making this the worst day for the benchmark index since Sept. 1.  Similar moves brought the Nasdaq down 0.69% to 2,131, while the Dow closed 0.83% below par at 9,748. Meanwhile, crude oil futures dropped below $68 a barrel, the dollar slipped, and the 10-year Treasury yield fell 10 basis points to 3.41%.

The equity losses came out of the blue following the relatively upbeat statement. The Fed's monetary policy board agreed that “economic activity has picked up following its severe downturn,” adding that inflation would “remain subdued.” That should give the central bank a green light to keep interest rates at exceptionally low levels.

The one new development in the statement was that the Fed extended its deadline to purchases mortgage-backed securities and Treasuries by three months, to the end of Q1 2010. This will “promote a smooth transition in markets,” the Fed said. 

“This minor elongation in the timetable for purchasing mortgage securities was a savvy move by the Fed as it reduces any discontinuities that might arise at the end of 2009, and allows more time for the banking sector to rebuild critical capital reserves and the housing market to gain further momentum,” said Brian Bethune, economist at IHS Global Insight.

So far, about $862 billion of MBS has already been purchased, and the central bank reiterated that it will purchase a total of $1.25 trillion in total, plus $200 billion in Treasuries. Aside from the three-month extension, no particulars of the exit strategy were included in the statement.

Looking ahead, the Fed expects the economy to “remain weak for a time,” but no specific time frame was mentioned. Meanwhile, the Fed will use a “wide range of tools” to preserve price stability and promote recovery.

Bethune added, “The Fed is betting that conditions should be improved by the second quarter of 2010, and therefore it makes sense to stretch out the timetable for supporting the mortgage markets.”