GLOBAL MARKETS-Stocks, yields fall after Fed; dollar gains

Wed Sep 21, 2011 3:07pm EDT

* Stocks fall; 10-year Treasury yields hit 60-year lows

* Fed launches $400 billion program to aid economy

* Fed noted significant downside risks to growth (Updates with Fed decision)

By Wanfeng Zhou

NEW YORK, Sept 21 (Reuters) - U.S. stocks fell on Wednesday and benchmark Treasury yields dropped to their lowest in over 60 years after the Federal Reserve launched a new $400 billion program to aid the U.S. economy, but said the economic outlook remains grim.

The U.S. dollar rose broadly after the Fed announcement, reversing losses against the euro. The Fed's measures will not lower the value of the greenback because the action will not require printing of new dollars, analysts said.

The Fed's program is designed to put more downward pressure on long-term interest rates over time and help the battered housing sector.

The U.S. central bank will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes and using those funds to purchase longer-dated Treasuries. It will also reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market For details, see [ID:nS1E78J25W]

On Wall Street, the Dow briefly turned positive after the Fed statement before turning sharply lower.

The Fed spooked investors with its comment on the economy. The Fed, in its policy statement issued after the close of its two-day meeting, said, "There are significant downside risks to the economic outlook."

"That headline of economic outlook -- I don't know why people are surprised to read that -- but it seems to be what people are fixated on and that is what is driving the market lower," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

The Dow Jones industrial average .DJI was down 99.30 points, or 0.87 percent, at 11,309.36. The Standard & Poor's 500 Index .SPX was down 12.08 points, or 1.00 percent, at 1,190.01. The Nasdaq Composite Index .IXIC was down 0.71 points, or 0.03 percent, at 2,589.53.

The MSCI world equity index .MIWD00000PUS slipped 1.2 percent.

The euro last traded down 0.3 percent at $1.3667 EUR=, while the dollar rose 0.2 percent to 76.53 yen JPY=EBS

"Medium- and short-run, this policy will have little impact on the economy and even less impact on the dollar," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "This is what was expected."

Benchmark 10-year note yields US10YTRR fell to new 60-year lows of 1.87 percent, down from 1.95 percent before the statement. (Editing by Leslie Adler)

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