Stocks dive as Fed unveils plan to buy $400bn debt

Dow Jones: 11,124.84 (–283.82) Nasdaq: 2,538.19 (–52.05) S&P 500: 1,166.76 (–35.33)US STOCKS slumped yesterday, sending the Standard and Poor's 500 Index down for a third day, as the Federal Reserve announced plans to buy $400 billion of long-term debt and cited risks to the economic outlook.

Caterpillar and Dow Chemical fell more than 4.2 per cent, pacing losses among companies most dependent on economic growth.

Financial companies in the S&P 500 lost 2.7 per cent as Moody’s Investors Service cut its debt ratings on Bank of America, Citigroup and Wells Fargo.

“Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks,” Mohamed A El-Erian, chief executive officer at Pacific Investment Management in Newport Beach, California, wrote in an e-mail. “They recognize that while Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomes.”

The Dow Jones industrial average fell 283.82 points, or 2.49 per cent, to end at 11,124.84.

The Standard & Poor’s 500 Index was down 35.33 points, or 2.94 per cent, at 1,166.76.

The Nasdaq Composite Index slid 52.05 points, or 2.02 per cent, at 2,538.19.

The S&P 500 had tumbled as much as 18 per cent from a three-year high at the end of April amid concern the economic recovery was weakening. The index rebounded 7.4 per cent through Tuesday after sinking to an 11-month low in August.

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed said.

Fed chairman Ben Bernanke said in an August speech that the central bank still has tools to stimulate the economy without signalling he will use them. He echoed comments of dissenting members of the Federal Open Market Committee who said then that US economic data are not pointing to a recession.

“The message is there’s not a lot the Fed can do,” James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, said.

“Whatever they are going to do to help is already there. We’ve got tons of liquidity. Then, what’s left is the impression that the Fed is scared about the global economy,” he said. – (Bloomberg)