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While you were sleeping: Fed signals shopping spree

Wednesday 11th August 2010

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Stocks in the US pared their losses and Treasuries surged after the Federal Reserve’s policy committee voted to buy longer-term US government debt in a fresh bid to spur the world’s biggest economy.

“To help support the economic recovery in a context of price stability, the committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.”

The committee met earlier today and released a statement about mid-afternoon New York time.

“The Fed decision is really what the market wanted and expected,” Don Wordell, a fund manager for Atlanta-based RidgeWorth Capital Management, told Bloomberg News.

“They also said that we’re in a bit of a slowdown and that the road to recovery will be longer. None of this surprises me.”

In late trading, the Dow Jones Industrial Average was down 0.42%, the Standard & Poor's 500 Index slid 0.53% and the Nasdaq Composite Index dropped 0.96%.

Among the most active on Wall Street were McDonald’s, eBay, Hewlett-Packard and Target.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, rose 1.29% to 22.02.

Yields on 10-year Treasuries slipped 8 basis points to 2.75%.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.1% to 80.80.

Ahead of the Fed statement, trading in most markets was subdued.

The Stoxx Europe 600 Index fell 0.9% to 259.93, reflecting concern that growth was slowing in China and wariness ahead of the Fed’s statement.

Across Europe, the UK’s FTSE 100 slid 0.6%, France’s CAC 40 shed 1.2% and Germany’s DAX decreased by 1%.

Among the most active stocks in Europe were Rio Tinto, Taylor Wimpey, Barratt Developments, Hannover RE and TUI Travel.

Stocks in China fell the most in six weeks after data on trade and property prices pointed to a deepening slowdown in the world’s third-biggest economy.

China’s trade surplus reached an 18-month high as exports rose to a record and import gains slowed, adding pressure on officials to allow faster appreciation of the yuan and signalling a diminished contribution to global growth.

The gap surged 170% from a year earlier to US$28.7 billion, the customs bureau said, exceeding the forecasts of all 29 economists in a Bloomberg News survey. Overseas shipments climbed 38.1% from a year earlier compared with a 43.9% gain in June.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 0.84% to 272.28.

Gold futures for December rose as high as US$1,208.40 an ounce on the Comex in New York after the Fed’s plan was announced. It had settled at US$1,198 on the exchange before the Fed statement.

Copper futures for September delivery slid 4.15 cents, or 1.2%, to close at US$3.3125 a pound about 45 minutes before the Fed’s statement was released. Earlier, the price touched US$3.2715, the lowest level for a most-active contract since July 30.

In its statement, the Fed’s policy committee said the most recent information that it had showed “the pace of recovery in output and employment has slowed”.

“Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract.

“Nonetheless, the committee anticipates a gradual return to higher levels of resource utilisation in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

“Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

“The committee will maintain the target range for the federal funds rate at 0 to 1/4% and continues to anticipate that economic conditions, including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionallylow levels of the federal funds rate for an extended period.”

The committee noted that there was one dissenting voice among their ranks: Thomas Hoenig.

He believes that the economy “is recovering modestly as projected” and that the Fed no longer needed to express the expectation that rates would remain low for an extended period.

Earlier in the day, the US government reported productivity in the US unexpectedly decreased in the second quarter after employers expanded the workweek by the most in four years even as the world’s largest economy cooled.

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