Global Stocks, Gold Fall on Fed's Surprise Move

stock board A tepid reading on inflation blunted the impact of the Federal Reserve's surprise move to raise the rate it charges banks for emergency loans. Although the Fed strove to allay fears that the dreaded draining of liquidity from the financial system is still months away, traders weren't buying it, interpreting the rate hike as the first step toward a broader tightening of credit. However, U.S. consumer prices barely budged in January, soothing some fears about inflation and further rate hikes.Judging by global market action, traders are convinced the Fed will raise rates sooner than expected, with potentially dire consequences. The dollar rose, while the euro hit a nine-month low. Gold and oil, which are denominated in dollars, also fell.

"Faster-than-usual fiscal tightening increases the risk of policy-induced double-dip [recession]," wrote analysts at Morgan Stanley (MS). "It's noteworthy that the recoveries in Japan in the 1990s and the U.S. in the 1930s were derailed by premature policy tightening."

Stock-index futures for the blue-chip Dow Jones Industrial Average ($INDU) were down 44 points, or 0.42%, at 10,331 as of 7:30 Eastern time, while stock-index futures tracking the broader S&P 500 ($INX) were off 7 points, or 0.6%, at 1,099, Futures for the tech-heavy Nasdaq Composite ($COMPX) were down 7 points, or 0.4%, at 1,814.

The U.S. Dollar Index, which measures the greenback against a trade-weighted basket of six major currencies, jumped 0.9% ahead of the open, a large move in currency terms. That put pressure on gold and oil futures. Gold lost another $7.50 an ounce, or 0.7%, to $1,111 and oil dropped 74 cents, or 0.9%, to $78.32 an ounce.

The selloff began late Thursday following the Fed's surprise move to raise the discount rate a quarter of a point to 0.75% from 0.5% in order to encourage banks to tap money markets rather than the central bank for short-term loans.

In a statement aimed at market speculation that the Fed is finally changing the ultra-accommodative monetary policy it has maintained since the financial crisis struck, the Fed said: "These changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy."
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