Markets settle on US Fed holding interest rate steady

Added by Gary Dunn on August 10, 2011

Financial markets rebounded on Tuesday as the US Federal Reserve said it will keep its key interest rate unchanged at least through mid-2013.

Australian shares rallied to end the day about 1% higher to 4,034 and the Dow Jones closed up by 4% to 10,240 while the Nasdaq closed up 5.3% to 2,483, both in stark contrast to Monday’s losses. The FTSE rose by 0.8%, Frankfurt’s DAX lost 0.1%, Hong Kong’s Hang Seng fell 5.7%, and Japan’s Nikkei was down by 1.7% on Tuesday.

Chief economist at Nationwide, Paul Ballew said, “We’re still in an environment that’s under a lot of stress so a couple hundred points on the Dow isn’t going to have us doing cartwheels. We’re still facing a lot of challenges with the headwinds in Europe and the U.S. debt situation.”

The US Federal Reserve acknowledged that this years growth has been considerably slower than expected, prompting worries of a new recession. The Fed said it would keep it’s exceptionally low interest rate at 0 to 0.25% at least through mid-2013.

Meanwhile, the European Central Bank’s purchase of Italian and Spanish bonds eased pressure on each nation’s respective government. The yield on Italian bonds eased to 5.2% and to 5.06% for Spanish bonds. Eurozone banks are also depositing large amounts of cash at the European Central Bank at lower rates instead of lending among themselves.