U.S. stocks fall, Treasury prices flat after Fed

A trader is pictured at the Frankfurt stock exchange, May 23, 2011.

Herbert Lash

NEW YORK (Reuters) - U.S. stocks fell, government debt prices were flat and oil rose after the Federal Reserve cut its forecast for U.S. economic growth but gave no hint of further stimulus plans.

The central bank said the U.S. economy should grow between

2.7 percent and 2.9 percent this year, down from an April projection of growth between 3.1 percent and 3.3 percent.

The Fed's pledge to continue interest rates at an exceptionally low level for an extended period indirectly buoyed oil prices because of the policy's longer-term impact on the dollar.

"The result of the low-interest rate policy continuing is a weaker environment for the dollar going forward ... this sent the markets a signal for bulls to sow their oats a little," said Phil Flynn, analyst at PFGBest Research in Chicago, referring to crude oil.

Oil prices rose. ICE Brent crude for August delivery settled up $3.26 at $114.21 a barrel.

U.S. August crude gained $1.24 to settle at $95.41.

U.S. stocks fell after the Fed said the recovery was sluggish. The Dow Jones industrial average .DJI lost 80.34 points, or 0.66 percent, to close at 12,109.67, according to the latest available figures. The Standard & Poor's 500 Index .SPX fell 8.36 points, or 0.65 percent, to end unofficially at 1,287.16. The Nasdaq Composite Index .IXIC dropped 18.07 points, or 0.67 percent, to finish unofficially at 2,669.19.

The euro added to losses after Fed Chairman Ben Bernanke said at a news conference that a disorderly default in a European country would roil financial markets and the impact on the United States would be "quite significant.

The euro was last at $1.4368, down 0.2 percent on the day and compared with $1.4411 before Bernanke's afternoon news conference.

The U.S. Dollar Index .DXY, which measures the greenback against a basket of major currencies, gained about 0.4 percent.

The benchmark 10-year U.S. Treasury note was unchanged and its yield stood a tad below 3 percent.

Bullion, which broke above its recent range after rising in six of the past seven sessions, held onto early gains after the Fed reaffirmed that its loose monetary policy.

U.S. August gold futures settled up $7 at $1,553.40 an ounce.

Economists said the Fed's statement after a two-day meeting by the interest-rate setting Federal Open Market Committee offered no surprises.

In Europe, two-year Greek bond yields fell after the government won a confidence vote, but the broader European periphery came under pressure and German Bunds rallied with a debt restructuring still seen as inevitable.

Greek Prime Minister George Papandreou and his new government won the vote of confidence overnight, but Greece must still approve tough austerity measures before it gets fresh funding from the European Union and the International Monetary Fund.

Markets had priced in a successful passage of the late night vote but respite for the euro zone's highly indebted issuers was short-lived and yield spreads over German debt widened.

The pan-European FTSEurofirst 300 .FTEU3 index of top shares closed down 0.5 percent at 1,091.46 points, while London's FTSE 100 index .FTSE fell 0.1 percent.

(Additional reporting by Angela Moon, Gertrude Chavez-Dreyfuss, Ellen Freilich and Frank Tang in New York; Joanne Frearson, Nia Williams, Kirsten Donovan, Simon Falush, Ikuko Kurahone and Amanda Cooper in London; Writing by Herbert Lash; Editing by Kenneth Barry)