Fed outlook for US economy lacks lustre

Federal Reserve Chairman Ben Bernanke provided investors with little incentive to commit fresh funds on Wall Street as the central bank cut its economic growth forecast for 2011.

Its planned purchase of US$600 billion of Treasuries would finish next week as planned, the Fed said, adding that it won't provide additional stimulus measures.

In late afternoon trading, the Dow Jones Industrial Average slipped 0.02 per cent. The Standard & Poor's 500 Index edged 0.03 per cent higher and the Nasdaq Composite Index inched up 0.08 per cent.

The US economy will grow 2.7 per cent to 2.9 per cent in 2011, policy makers forecast now, down from a 3.1 per cent to 3.3 per cent estimate. It's not what investors were looking to hear.

"We seem to be in this in-between world economically where it's not clear things are slowing, and it's certainly not clear things are improving," Rick Meckler, president of investment firm LibertyView Capital Management in New York, told Reuters.

"That is a step that people want to see - either acknowledgement by the Fed that things are getting much better or worse - or some actual economic numbers that do that. Statements that they are going to maintain the course don't really say much about where we are headed."

US Treasuries gave up earlier gains, with yields on 10-year notes up less than one basis point to 2.99 per cent at 2.37pm in New York, according to Bloomberg Bond Trader prices.

"Anyone looking for QE3 or who was expecting them to get more aggressive about unwind was disappointed," Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group, one of 20 primary dealers that trade directly with the central bank, told Bloomberg. "The Fed took the really conservative road. There is nothing surprising about this statement."

There were some bright signs today, as economic bellwether FedEx Corp gained more than 3 per cent after reporting solid fourth-quarter profit and forecasting strong 2012 earnings.

Billionaire investor Ken Fisher is among the optimists. Volatility in equity markets is creating opportunities for investors to position themselves for a resumption of the bull market next year, according to Fisher, Reuters reported.

Fisher, founder of Fisher Investments, which manages about US$38 billion in equities, believes the US stock market will finish only slightly higher this year before returning to the winning ways of the previous two years, when prices doubled in the wake of the financial crisis in 2008.

"When returns categories are low overall micro decisions become the be-all-and-end-all," said Fisher. "In my mind what you want to be doing now is buying things that you think will do well as the bull market resumes with gusto in 2012."

Across the Atlantic, the euro was last 0.2 per cent lower at US$1.4380.

The single zone currency weakened after Bernanke said at a press conference that a disorderly default in a European country would cause instability.

The greenback was last 0.2 per cent stronger against a basket of major currencies.

Oil prices rose. ICE Brent crude for August delivery rose US$3.03 to US$113.98 a barrel by 2.35pm EDT. US August crude gained US$1.24 to settle at US$95.41.

"The result of the low-interest rate policy continuing is a weaker environment for the [US] dollar going forward... this sent the markets a signal for bulls to sow their oats a little," Phil Flynn, analyst at PFGBest Research in Chicago, told Reuters.

Spot gold was 0.5 per cent higher at US$1,553.80 by 12.36pm EDT.

- BusinessDesk

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