Wed, August 11, 2010
Business > Markets

US stocks retreat as Fed grows more cautious

2010-08-11 13:53:19 GMT2010-08-11 21:53:19 (Beijing Time)

Stocks and interest rates tumbled Wednesday as investors worldwide grew increasingly concerned about the health of the U.S. economy based on actions by the Federal Reserve.

U.S. investors followed the lead of overseas stock markets, which fell sharply. Japan's Nikkei stock average was hit especially hard by the rising value of the yen, which will hurt the exporting sector. The dollar is at a 15-year low against the yen.

The Fed said Tuesday it will start buying government bonds with money it gets from the maturing mortgage-backed bonds that it bought during the recession. The goal is to try to cut interest rates on mortgages and corporate loans, which in turn would increase borrowing and help the economy grow faster.

It could also drive the prices of Treasurys so high and their yields so low that they are no longer attractive investments, forcing traders to move into riskier assets that have the potential for bigger profits, like corporate debt and stocks.

The sell-off comes after the Fed took a much more cautious view of the recovery. In its statement at the conclusion of the meeting, the Fed said the recovery "has slowed in recent months." It reinforced comments from Chairman Ben Bernanke last month when he spooked the market by saying the pace of recovery was "unusually uncertain."

In early morning trading, the Dow Jones industrial average dropped 197.53, or 1.9 percent, to 10,446.72. The Standard & Poor's 500 index fell 22.06, or 2 percent, to 1,099.00, while the Nasdaq composite index fell 54.64, or 2.4 percent, to 2,222.53.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 2.71 percent from 2.77 percent late Tuesday. Interest rates are often set based on the yield of 10-year Treasurys.

The 10-year yield is at levels not touched since late March 2009 just weeks after recession worries sent the stock market to a 12-year low.


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