Fed supports optimism overnight on Wall St

The Federal Reserve headquarters in Washington, D.C. Photo / Thinkstock

Wall Street drew cautious confidence from a US central bank statement that it was ready to bolster its support for the economic recovery if needed.

The Federal Reserve made no shift in monetary policy at the end of its scheduled one-day meeting, reiterating that it would keep its benchmark lending rate in a range of zero to 0.25 per cent "for an extended period". It also didn't detail any new asset purchase plans.

"The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate," the Fed said in a statement.

Policy makers said the pace of recovery and job growth have "slowed in recent months". The committee also said inflation is "currently at levels somewhat below" what officials judge to be consistent with price stability, which some investors were interpreting as the Fed acknowledging deflation risk.

Overall, investors responded to the Fed's statement by buying stocks. In late trading, the Dow Jones Industrial Average rose 0.48 per cent, the S&P 500 gained 0.27 per cent and the Nasdaq Composite Index advanced 0.22 per cent.

"This keeps the status quo and was exactly what the market was looking for," Steven Baffico, senior managing director at Claymore Securities Inc in Lisle, Illinois, told Reuters. "We've been getting some encouraging data and stabilising numbers, so they were very careful to telegraph their message."

US Treasuries gave up some of their earlier gains as the Fed stopped short of saying it would buy more government debt to bolster the economy. Yields on shorter dated securities fell amid the continued outlook for the federal funds rate.

The 10-year yield was last at 2.68 per cent, from 2.70 per cent late on Monday.

Meanwhile, shares of major US homebuilders thrived on better-than-expected housing starts in August, gaining a second day Lennar Corp yesterday posted results that exceeded estimates.

Today the US Commerce Department said August's housing starts climbed more than anticipated to their highest level in four months. Permits rose 1.8 per cent from July.

"The housing market has found a bottom, and we're bouncing along here," Thomas Simons, an economist at Jefferies Group Inc in New York, told Bloomberg.

"The market is challenged by supply, and until that is cleared out, it will be tough for the homebuilders. We also need additional job creation."

The benchmark Stoxx Europe 600 Index fell 0.5 per cent to close at 265.01, paring yesterday's 1.3 per centrally.

The VIX, or Wall Street's fear gauge, edged higher, rising 0.33 per cent to 21.57.

The Dollar Index, which measures the greenback against a basket of six major currencies, dropped 1.2 per cent as the Fed confirmed it would keep interest rates low. The greenback slid back below the 85 yen mark.

Gold futures surged as much as 0.7 per cent to US$1,289.40 an ounce.