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While you were sleeping: Fed to keep rates low

While you were sleeping: Fed to keep rates low

(BusinessDesk) August 10 - Stocks on Wall Street seesawed, giving up gains immediately after the Federal Reserve said it would not buy any more bonds, quashing hopes that the central bank would launch another round of stimulus measures. However, stocks rebounded late afternoon again after the Fed pledged to keep rates low for another two years.

After rising before the Fed’s announcement, two of the three key U.S. stock indexes gave up their gains, before recovering again in late trading. The Dow Jones industrial average was last up 0.81%, the Standard & Poor's 500 Index was 1.48% higher while the Nasdaq Composite Index was 1.85% stronger.

The Fed promised to keep its benchmark interest rate at a record low through mid-2013 as policy makers were less optimistic about the economy than in their previous statement at the end of June.

“Economic growth so far this year has been considerably slower than the committee had expected,” the FOMC said in a statement.

The U.S. dollar was hit. The greenback dropped 5.9% against the Swiss franc at 2.45pm in New York, while declining 1% and 0.2% against the yen and the euro respectively.

“We have a one-two punch here,” Brian Dolan, chief strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey told Bloomberg News.

“The one was a pledge to maintain rates at extremely low levels until at least mid-2013, and that temporarily saw risk rally and the dollar get hit. Now we’re seeing risk coming off as all of the economic observations were on the downside, stressing the deterioration in the U.S. recovery, and that may be the lasting impression.”

Two-year U.S. Treasuries rallied, however. The yield on the two-year note dropped 10 basis points to 0.17%, according to Bloomberg.

“It’s pretty amazing that the Fed will be exceptionally low until 2013,” Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, told Bloomberg. “They are telling you that we are in a stage of Japanese-like growth. The front end is rallying like crazy.”

Today’s three-year note auction drew a yield of 0.50%, the lowest yield since records began in May 1981, and less than the 0.523% average in a Bloomberg News survey of seven of the Fed’s primary dealers.

Meanwhile, thirty-year bond yields rose six basis point to 3.71%.

The U.S. faces one-in-four odds of slipping back into recession, and a weaker economic outlook is raising the likelihood the Fed will soon do more to boost growth, a Reuters poll of more than 70 economists showed.

Just two weeks ago, economists saw the chances of another recession at one-in-five. Now they see it at one-in-four.

It looks there won’t be any monetary policy stimulus from China either. A report today indicated that the country’s inflation rose to the fastest pace in three years in July, making it harder for the central bank to easy monetary policy at a time the global economic outlook is darkening.

Oil dropped, falling 3.5%.

Gold held on to its gains following the Fed’s statement. Spot gold was at US$1,753.70 an ounce, up 2%, after rising to a record of US$1,778.29 in early trading.

In Europe, the Stoxx 600 Index ended the day with 1.4% gain, recovering from a 5.1% drop earlier in the session.

(BusinessDesk)

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