Slump goes on as all eyes on the Fed

Stocks fell for a second consecutive day yesterday after the Federal Reserve gave no hints of new stimulus measures to offset the effects of the worsening European debt crisis.

Though the Fed did leave the door open to further easing next year, as it has done after recent meetings, it gave no indication it was any more inclined to provide new economic stimulus.

The Fed left monetary policy on hold and said financial market turbulence posed threats to economic growth. It also characterised the US economy as expanding moderately despite an apparent slowing in global growth, though it added that unemployment remains elevated and housing activity depressed.

The Fed “gave the economy a very slight upgrade, but it sort of took the wind out of domestic equities, probably because some were hoping that they would hint at another quantitative easing-like program,” said Robert Phipps, a director at Per Stirling Capital Management.

Wall Street traded higher for much of the volatile session, but turned negative after the Fed’s announcement. The losses accelerated going into the close and the S&P 500 briefly fell below its 50-day moving average. A close under that key level could signal more losses to come.

The Dow Jones industrial average slid 66.45 points, or 0.55 per cent, to end at 11,954.94. The Standard & Poor’s 500 Index dropped 10.74 points, or 0.87 per cent, to 1,225.73. The Nasdaq Composite Index lost 32.99 points, or 1.26 per cent, to close at 2,579.27.

The disappointment with the Fed came at the tail-end of a trading session that was largely focused on Europe, especially after German Chancellor Angela Merkel rejected any suggestion of raising the limit on Europe’s bailout fund.

Investors had been closely eyeing developments concerning the fund, the European Stability Mechanism (ESM), which will go into effect from the middle of next year and replace the current European Financial Stability Fund. The ESM will have an effective lending capacity of €500bn (£420.78bn).

“The developments in Europe don’t address the region’s short-term liquidity issues, so the next step is trying to figure that out,” said Randy Frederick, director of trading and derivatives for Charles Schwab.

“That uncertainty is why our markets have been pressured lately.”