International Radio Pictures: August 2011

Wednesday, August 10, 2011

US STOCKS OPEN HIGHER AFTER MONDAY'S ROUT

News the US Federal Reserve is to keep interest rates frozen for two years saw the Dow Jones, and markets worldwide, surge. Photograph: Stan Honda/AFP

Stock markets around the world rallied after the US Federal Reserve said US interest rates would be frozen for the next two years, and hinted at more economic stimulus to stave off a global recession.

The FTSE 100 in London climbed 64 points to 5229 in early trading, up 1.25%, This added to Tuesday's gains, when the index rose 96 points or 1.9%, its first increase in eight days, in anticipation of Fed measures designed to prevent the US economy sliding back into recession. The Dow Jones industrial average surged nearly 430 points to 11239.77, a gain of almost 4%, on Tuesday, a day after suffering its worst point decline since 2008.

Asian markets also rose, with Japan's Nikkei climbing 94.26 points, or 1.05%, to 9038.74 while Hong Kong's Hang Seng added 495.16 points, or 2.56%, to 19,825.86.

The Fed lowered interest rates near zero in response to the financial crisis in 2008. Since then, it had been saying that rates would stay low for an "extended period". On Tuesday, it modified that statement to say that this would continue until at least mid-2013, as the economy was expected to stay weak for two more years.

America's central bank said it expected "a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting". It added that it had discussed "the range of policy tools" it could use to boost the economy. There is speculation that this could include a fresh round of bond-buying, known as quantitative easing, or QE3.

"If there is such a thing as an aggressively dovish approach that's the route the Fed chose yesterday," said Gary Jenkins, head of fixed income research at Evolution Securities. Paul Dales, senior US economist at Capital Economics, said: "The US Fed's decision to pledge to keep interest rates exceptionally low for much longer than previously is largely a symbolic gesture designed to reassure the financial markets rather than boost the real economy. More interesting is that the Fed considered other forms of policy stimulus, perhaps even QE3. The chances of QE3 have increased a bit, but the rebound in core inflation and the growing division at the Fed mean it is more likely to come next year than this year."