U.S. stocks fall, bonds rally as Fed stands pat

By Richard Leong NEW YORK (Reuters) - U.S. blue-chip stocks fell in volatile trading on Thursday while bond prices jumped after the Federal Reserve decided to hold U.S. interest rates near zero on concerns about global weakness but left the door open for a rate increase later this year. The dollar posted its biggest one-day loss in a month against a basket of currencies as the U.S. central bank refrained after a two-day policy meeting from further spooking investors already fretting about China's slowing economy hurting the rest of the world. "Given the global headwinds, the last thing we need right now was a hike in rates and any kind of hawkish projections," said Brian Dolan, head market strategist at DriveWealth in Chatham, New Jersey. A weaker greenback briefly lifted oil futures but they quickly turned negative on renewed worries about global demand. The Dow Jones industrial average <.DJI> ended down 65.21 points, or 0.39 percent, to 16,674.74, the S&P 500 <.SPX> closed 5.11 points, or 0.26 percent, lower at 1,990.2 and the Nasdaq Composite <.IXIC> finished down 4.71 points, or 0.1 percent, to 4,893.95. [.N] "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Fed said in its policy statement after the meeting. It added the risks to the U.S. economy remained nearly balanced but that it was "monitoring developments abroad." The Fed dialled back its outlook on how fast it would raise rates after its first hike, while some analysts interpreted Chair Janet Yellen's remarks at her press conference following the meeting that she was not strongly committed to hiking rates by year-end. "There's nothing she said at all that was hawkish. The downside is still their (the Fed's) worry," said Aaron Kohli, interest rate strategist at BMO Capital Markets in New York. Interest rates futures implied traders now see a 49 percent chance of a Fed rate hike at its December meeting, down from 67 percent earlier Thursday. The likelihood the Fed might not begin to normalise rates until 2016 raised concerns about the profitability of banks, spurring weakness in financial stocks which dragged down the broader stock market, analysts said. The MSCI world equity index <.MIWD00000PUS>, which tracks shares in 45 nations, erased earlier gains to end little changed at 398.77. Before the Fed's rate decision, the pan-European FTSEurofirst 300 index <.FTEU3> finished down 0.2 percent at 1,424.70. Earlier, Tokyo's Nikkei index <.N225> ended up 1.4 percent. [.EU] [.T] The Fed's willingness to leave rates near zero longer than some traders had previously thought spurred a flood of buying in Treasuries. Two-year Treasuries rose 8/32 in price for a yield of 0.686 percent, down 12.5 basis points from late Wednesday. It was the steepest one-day decline since March 2009, according to Reuters data. [US/] The dollar index <.DXY>, which tracks the greenback versus a basket of six currencies, fell 1.1 percent, to 94.420. [FRX/] Brent crude settled down 67 cents or 1.35 percent, at $49.08 a barrel. U.S. crude settled down 25 cents, or 0.53 percent, at $46.90. Spot gold rose $12.36 or 1.10 percent, to $1,131.51 an ounce. (Additional reporting by Gertrude Chavez-Dreyfuss in New York,; Marc Jones and Marius Zaharia in London and Saikat Chatterjee in Hong Kong; Editing by Nick Zieminski and James Dalgleish)