Shares Slide On Federal Reserve Warning

Global shares have fallen sharply after the Federal Reserve gave a stark warning about the state of the US economy and announced limited measures designed to boost growth.

The Fed warned of "significant downside risks" as it announced a bond swap programme designed to keep long-term interest rates low.

Major European markets all dropped in morning trading, with the FTSE down 4%, and the Cac-40 down 4.32%.

On Wednesday, the Dow Jones fell 2.5%.

Bond plan

Following a two-day meeting, the Fed warned: "Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.

"There are significant downside risks to the economic outlook, including strains in global financial markets."

It also unveiled a stimulus plan - dubbed Operation Twist - designed to help stimulate the flagging US economy.

The Fed will sell about $400bn (£260bn) of short-term bonds and buy longer-term debt. Buying bonds pushes the price up and lowers the interest rate, or yield.

The Fed hopes the move will help to keep long-term interest rates low, thereby boosting mortgage lending and loans to businesses.

The policy, the first of its kind since the early 1960s, does not inject any new money into the economy.

A number of analysts, some of whom were expecting the Fed to expand on its two previous rounds of quantitative easing (QE), under which it created money to buy assets to try and boost demand, expressed scepticism at the Fed's latest move.

"It seems the market doesn't believe Operation Twist is enough to kick start the spluttering economy," said Ben Potter, market strategist at IG Markets.

"This, [together with] a very downbeat outlook... seems to have unsettled markets even further."

The move by the Fed comes amid deepening gloom about the global economy, with the International Monetary Fund cutting growth estimates for the US, Europe, and Japan.

It comes as new figures show the eurozone's private sector contracted in September for the first time in two years.

Markit's purchasing managers' index (PMI) of activity dropped to 49.1, from 51.5 last month. A reading below 50 indicates contraction.

On Wednesday, the Bank of England said members of its Monetary Policy Committee had considered a new round of quantitative easing to pump money into the economy.