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Market Stutters After Fed Holds Line On Rates

A man walked past a billboard showing global stock indices at the Taiwan Stocks Exchange in Taipei as markets extended losses Tuesday.
Sam Yeh
A man walked past a billboard showing global stock indices at the Taiwan Stocks Exchange in Taipei as markets extended losses Tuesday.

U.S. stocks shed their early gains and dropped Tuesday afternoon after the Federal Reserve signaled its willingness to keep interest rates low, but offered little else to stabilize shaky global markets.

The Dow Jones industrial average, up 2 percent earlier in the day, slipped in and out of negative territory after the Fed's Open Market Committee released its statement. The panel said the inflation outlook was "likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The tumultuous day of trading followed Monday's 634-point loss for the blue-chip index — the worst single day since the 2008 collapse of Lehman Brothers.


Earlier Tuesday, Asian markets also fell, with Hong Kong's Heng Seng index tumbling 5.7 percent and Japan's Nikkei losing 1.7 percent. Europe fared better, with the FTSE 100 index of leading British shares up 0.2 percent while France's CAC-40 rose 0.7 percent. Germany's DAX shed 1.4 percent.

Investors have been spooked by fears over the consequences of the U.S. credit downgrade, Europe's debt crisis and mounting expectations of a global recession.

Many on Wall Street had been hoping the Fed would consider another monetary stimulus, which would be its third in the last three years, but the central bank's statement gave no such indication.

Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected. Intensifying concerns were reports showing that the manufacturing and services industries barely grew in July, although job growth was better than economists expected last month.

Investors are also worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe's 21-month-old debt crisis.


The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and in even higher borrowing costs for the two countries. The European Central Bank stepped in Monday and bought billions of euros worth of their bonds.

In the oil markets, worries over the state of the global economy continued to weigh on prices. The main benchmark rate was down $3 at $78.31 a barrel. Earlier it had fallen to $75.71, its lowest since September 2010.

Stock markets in the traditionally oil-dependent Middle East also fell Tuesday, including the benchmark index in OPEC powerhouse Saudi Arabia, the region's largest economy. It dropped 3.6 percent by midday.