U.S. stocks, dollar fall on Fed's nod to market turmoil

NEW YORK (Reuters) - Wall Street stocks and the dollar fell on Wednesday as the Federal Reserve held U.S. interest rates unchanged, as expected, and said it was closely monitoring global economic and financial developments.

An investor looks at an electronic screen at a brokerage house in Hangzhou, Zhejiang province, January 26, 2016. REUTERS/China Daily

The Fed’s more cautious outlook reduced the likelihood it would raise rates by a quarter-point four times this year, which hurt the greenback, but its latest assessment on the economy did not wipe out the chances of a possible rate increase in March, which disappointed some stock investors.

“The Fed did the right thing by not making any significant changes, if they did come out and sound overly dovish I think that would effectively shut the door on a March hike,” said Tom Porcelli, chief economist at RBC Capital Markets in New York.

The Fed’s acknowledgement of risks to the domestic economy, with oil prices hitting 12-year lows and jitters about Chinese growth, revived some safe-haven bids for gold and U.S. Treasury debt prices.

Oil futures clung to earlier gains, brushing off the Fed’s more cautious outlook since its December policy meeting when the central bank raised rates for the first time in nearly a decade.

“The committee is closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation,” the Federal Open Market Committee, the Fed’s policy-setting group said in a statement.

New Zealand’s central bank also decided to leave local interest rates unchanged but said more easing may be required due to low inflation.

Analysts and investors said the statement signalled U.S. policymakers have scaled back their view on the chances of a rate hike at its next meeting in March.

U.S. interest rates futures implied traders see a 29 percent chance the Fed will raise rates at its next policy meeting in March, down from 31 percent late on Tuesday, according to CME Group’s FedWatch programme.

Prior to the FOMC statement, U.S. stock prices were buoyed by a rebound in crude prices following data showing a jump in weekly demand for oil products and news Russia was discussing a possible output pact with OPEC.

Brent oil LCOc1 settled up $1.30 or 4.09 percent at $33.10 a barrel, while U.S. crude futures CLc1 ended up 85 cents or 2.70 percent at $32.30 a barrel.

The Dow Jones industrial average .DJI fell 222.77 points, or 1.38 percent, to 15,944.46, the S&P 500 .SPX declined 20.68 points, or 1.09 percent, to 1,882.95 and the Nasdaq Composite .IXIC shed 99.51 points, or 2.18 percent, to 4,468.17.

Apple and Boeing’s disappointing forecasts also helped drag U.S. stock indexes lower.

Earlier on Wednesday, the pan-European FTSEurofirst 300 index .FTEU3 rose 0.4 percent at 1,340.76. Chinese shares .CSI300 ended stronger, and Tokyo's Nikkei .N225 finished 2.7 percent higher.

The dollar index .DXY, which gauges the greenback against six currencies, was down 0.4 percent at 98.97.

The New Zealand dollar fell 1 percent against the greenback NZD=D4 at $0.6431 following the Reserve Bank of New Zealand's policy statement.

In the bond market, benchmark 10-year Treasury note yields US10YT=RR fell to 2.00 percent from 2.05 percent before the statement, ending little changed on the day.

Traditional safe-haven gold rose for a third straight day to its highest level since early November, last up 0.46 percent at $1,125.37 an ounce XAU=.

Additional reporting by Karen Brettell in New York; Marc Jones, Amanda Cooper in London; Editing by Nick Zieminski and Meredith Mazzilli