Market hopes dashed as Fed says interest rates will remain low

Hopes that the United States would embark on a fresh round of fiscal stimulus to boost its ailing economy were dashed last night, sparking fresh fears about renewed stock market turmoil.

London's battered shares index dodged its longest losing streak for eight years yesterday because of hopes that the US Federal Reserve would announce a third round of money printing, or quantitative easing (QE).

However, that hope proved ill-founded when the Fed warned that growth had been slower than expected and said interest rates would remain at a record low for the next two years.

In the wake of the Fed's announcement, stocks on Wall Street fell, which will cause further concern for UK investors who had been boosted today after the FTSE 100 Index closed up almost 2 per cent.

The rise meant the London market avoided its eighth consecutive day of falls, which would have been its worst run since January 2003.

The Footsie has tumbled some 10 per cent in the past two weeks amid panic that the eurozone will be crushed under the weight of its debts and the US will lead the world back into recession.

Traders had pinned their hopes on Fed chairman Ben Bernanke taking action to restore confidence after the US was stripped of its AAA credit rating for the first time. But tonight the Fed said it expects to keep its key interest rate close to zero until mid-2013.

It was downbeat on the prospects for the US economy, saying that so far this year, it had grown "considerably slower" than expected and it foresaw "a somewhat slower pace of recovery over coming quarters".

The gloomy outlook led the Dow Jones down more than 1.5 per cent; the S&P was more than 1 per cent lower, and the Nasdaq lost nearly 1 per cent.

Clem Chambers, chief executive of financial website Adven, had said that if the Fed announced another round of QE, the "market will rally hugely".

But he warned: "If there is no shock and awe from the Fed, the Dow Jones will roll over and head towards 10,000."

Traders are terrified that the stock market falls could help push the global economy into recession by destroying consumer confidence, prompting traders to dump more stocks and creating a vicious circle.

Despite yesterday's improvement, the Footsie has lost about 900 points in a month and yesterday posted four consecutive sessions of triple-digit losses for the first time in its history.Banking shares continued to bear the brunt of the turmoil as investors fretted about their exposure to indebted economies, such as Spain and Italy, and after heavy losses for counterparts in New York last night.

Taxpayer-backed Royal Bank of Scotland was among the Footsie's biggest fallers, down 4 per cent, although at one point it had been down 10 per cent.

It has lost about a quarter of its value in the past two weeks