The latest monetary policy announcement from the US Federal Reserve on Wednesday (September 16) provided little cheer for investors on Wall Street and around the world, despite the central bank's pledge to offer continued support for the American economy for several years.
While the Fed indicated its benchmark interest rate is likely to remain close to zero for at least the next three years, it stopped short of announcing fresh stimulus measures to shore up the US economy amid the ongoing coronavirus pandemic.
Both the Nasdaq Composite and the S&P 500 indices closed lower on Wednesday, while Asian markets were down on Thursday.
The Fed outlook
Fed chairman Jerome Powell said most officials at the US central bank did not expect to support a change to the current low interest rate policy until the economy is "far along in its recovery" from the Covid-19 crisis.
New projections released on Wednesday showed that bank leaders expect a contraction of 3.5% in the US economy this year, an improvement from the 6.5% decline forecast in June. The predicted unemployment rate was also revised down to 7.6%.
Powell said government financial support for businesses and workers affected by the pandemic had played a "critical" part in the better-than-expected recovery.
However, he also warned that more fiscal stimulus from Congress will probably be needed to ensure the recovery can be sustained.
"My sense is that more fiscal support is likely to be needed," Powell said. "Of course, the details of that are for Congress, not for the Fed. But I would just say there are roughly 11 million people still out of work due to the pandemic and a good part of those people were working in industries that are likely to struggle."
Lawmakers in Washington have reached something of a stalemate on the issue of providing further financial assistance to support the economic recovery. Democrats are calling for more aggressive action than many Republicans are willing to support.
President Donald Trump tweeted on Wednesday that his Republican party should get behind "much higher numbers" for aid and claimed the US economy is doing "unbelievably well".
Despite the better-than-expected economic outlook, stock prices dropped in the wake of the Fed announcement, with investors seemingly discouraged by the lack of any concrete economic stimulus measures.
Wall Street reacts
The S&P 500, having gained 0.8% between the close of trading on Monday and the time of the Fed update on Tuesday afternoon, dropped by more than 1% in the last two hours of trading to finish the day nearly 0.5% down.
There was an even sharper fall on the tech-focused Nasdaq Composite, which tumbled by more than 173 points in just over an hour and lost more than 1.2% of its value over the course of the day. The index has fallen by more than 7% since the start of September.
Soichiro Monji, chief strategist at Nishimura Securities in Kyoto, told Reuters: "In essence, high-tech shares were overbought and we've seen a correction since early this month. I think that is still continuing, with the Fed just being a fresh trigger."
The Dow Jones Industrial Average ended the day in positive territory (+0.13%), but was some way off the almost 1.1% gains it witnessed earlier in the day.
The effects of the Fed announcement were felt far beyond the US. All of the main Asian markets finished in the red on Thursday, with Hong Kong's Hang Seng Index ending the day with a 1.56% loss, the Asia Dow dropping by 1.21% and Japan's Nikkei 225 down by 0.67%.
A statement from Mizuho Bank of Japan said traders had hoped the Fed would back up its words with policy action, but "ended up a tad disappointed". It added that the US central bank was "long on talk and short on action".
European markets also faltered on Thursday morning. The FTSE 100 tumbled by 1.2% at the open and stayed in negative territory throughout the session as traders awaited an interest rate decision from the Bank of England.
Germany's DAX index, France's CAC 40 and the pan-European Stoxx 600 were all down by around 0.7% towards the end of the morning.