Dow off 206 after Bernanke sees end to Fed easing

Stocks sag as the Fed chairman says a stronger economy may let the central bank start to end its bond-buying program late this year. But Bernanke sees low rates lasting into 2015.

By Charley Blaine Jun 19, 2013 2:12PM
Federal Reserve Chairman Ben Bernanke in New York on Nov. 20, 2012 (© Richard Drew/AP Photo)Updated: 5:22 p.m. ET.

Stocks plunged Wednesday after Federal Reserve Chairman Ben Bernanke said a key program to keep interest rates low may start to end later this year.

But Bernanke said the Fed does not expect to start raising its key interest rate until probably the first half of 2015.

The Fed has been buying $85 billion a month in Treasury and mortgage-based securities. Bernanke told a news conference Wednesday that the Fed could start to trim the size of the purchases late this year, ending the purchases entirely in mid-2014.

The decision to trim the bond purchases would depend on the economy moving ahead, something the Fed expects. In its statement stating the current pace of bond buying will continue, the Fed said the downside risks to the economy have "diminished since the fall."

The Fed's optimism, however, did not cheer Wall Street. Instead, the fear of rising interest rates at some point in 2015 caused heavy selling.

The Dow Jones industrials ($INDU) closed down 206 points to 15,132 on Wednesday. The Standard & Poor's 500 Index ($INX) was off 21 points to 1,631, and the Nasdaq Composite Index et ($COMPX) was down 36 points to 3,447.

The 10-year Treasury yield, meanwhile, moved up to 2.31% from Tuesday's 2.18%. The 10-year yield was 3.3% at the end of 2010.

The Dow has risen or fallen more than 100 points for seven straight sessions, something not seen since 2011. Wednesday's losses were the worst one-day losses for the major indexes since June 5.

Crude oil (-CL) dropped 19 cents to $98.48 a barrel. Brent crude, a key influence on retail gas prices in the United States, was at $105.60 a barrel, down 42 cents. Gold (-GC) moved up $7.10 to $1,374 an ounce.

So, when might the Fed start to raise its key federal funds rate? Probably not until  the first half of 2015. That's a touch sooner than Wall Street had been expecting. The fed funds rate is what banks pay each other for overnight loans, and is the foundation on which most U.S. interest rates are built. The target is now 0% to 0.25%.

With the fed funds rate so low, the central bank has had to find other ways to ensure lower rates, to help nourish a modest recovery that began in late 2009. So, the Fed has been buying in $45 billion a month in Treasury securities and $40 billion a month in mortgage-backed securities.

Despite the stock market's worries, mortgage rates will probably remain at or near current rates. The national rate for a 30-year mortgage was about 4%, Bankrate.com said Wednesday. A 48-month loan for a new-car loan would cost 2.6%.

Partly this is because the Fed sees the economy growing modestly at best over the next year or so, with unemployment dropping from 7.5% now to maybe 7.2% to 7.3% by the end of the year and 6.5% to 6.8% in 2014. Gross domestic product growth may be as much as 2.3% to 2.6% this year, 3% to 3.5% in 2014 and 2.9% to 3.6%.

The projections are mostly improvements over projections made in March.

Inflation is likely to remain under 2% for the medium term, less than the Fed wants.

Stocks have more than doubled since the market bottom in 2009, in large part because the Fed has aggressively sought to keep interest rates low. That's forced many investors to look to stocks for big returns, and it has slowly set up some key areas of the economy -- automobiles and housing -- to recover from the 2008-2009 financial crash.

But the big rally has stalled in recent weeks, as worries about where the Fed was headed grew. The 10-year Treasury moved from 1.63% at the beginning of May to more than 2.3% on Wednesday.

The text of the Fed's statement was little changed from what the Fed said after its April 30-May 1 meeting. The economy was growing modestly. There's a bit more jobs growth, and the housing market is showing more strength. 

But fiscal restraint -- at the federal and state and local levels -- is acting as a drag on the economy back, the Fed statement said.

There were two dissents to the Fed decision. James Bullard, president of the Federal Reserve Bank of St. Louis, who wants the Fed to defend 2% inflation to promote growth. Esther George, who runs the Federal Reserve Bank of Kansas City, dissented because she worries the current Fed policy could boost inflation expectations.

All of the 30 Dow stocks were lower on the day, The best relative performer was Hewlett-Packard (HPQ), down 4 cents to $25.43. The worst performer was Verizon Communications (VZ), down $1.50 to $50.05.

Meanwhile, only 28 S&P 500 stocks were higher, led by Adobe Systems (ADBE) and NVidia (NVDA). Regeneron Pharmaceutical (REGN) and Plum Creek Timber (PCL) were the laggards.

Adobe and NVidia were the leaders among Nasdaq-100 stocks. Regeneron and Biogen Idec (BIIB) were the laggards. The index was down 37 points to 2,960. Only 10 stocks in the index were gainers.

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188Comments
Jun 19, 2013 2:29PM
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What is the FED afraid of? What is Ben Bernanke so scarred to death of that the stimulus must be continued? A complete collapse of not just the U.S. economy, but the whole global economy, too? If the recovery has been such a great success then why do we still require stimulus -- going on now for the past 4-years? I bet that without stimulus we would see how dead everything really is. The whole thing would go belly-up.
Jun 19, 2013 2:56PM
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Quantitative easing = printing money = inflation. I know that might seem obvious to some, but all this technical garbage is just to cover what most already know deep down inside. The majority of our economic activity, the lion's share in fact, IS the newly printed money, to the tune of at least $85 billion a month. Many suspect the true number is even larger. But still, for fiscal year 2013 total US spending amounted to about $6.2 trillion. Of that, about $3.7 trillion came from the Feds. Its honestly unknown exactly how much of that is QE, but some estimate as much as half or more. And since the US accounts for about 25% of the world's GDP, you don't have to be a rocket scientist to figure out we carry the world economy, the Fed carries us, and the QE is a big part of carrying the Fed. So like I said, when it stops, the music stops folks. Better hope you have a chair.
Jun 19, 2013 4:19PM
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Printed money and inflation create no jobs. No jobs no demand. No demand no economic growth. The only thing the fed is doing is providing inflated asset values and low interest for government debt, and screwing the hell out of the American people.
Jun 19, 2013 3:11PM
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Bernanke should be doing time in a federal prison for theft and extortion of the American People !
Jun 19, 2013 2:29PM
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Not that I'm an expert at reading body language, but I never got a real feeling that this guy exudes confidence.......
Jun 19, 2013 3:31PM
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Get that SOB out of his Govt. Job.  He has done nothing to help the U.S.
Jun 19, 2013 3:32PM
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The ONLY thing I want Helicopter ben to clarify is WHEN IS HE GOING TO LEAVE THE FED?

 

Trying to force everybody to put their savings into the stock market?  One the most CORRUPT places in the country after the US house and senate?

 

If it hadn't been for the FED in the first place, we wouldn't BE in this mess now.

 

Ben, stop trying to tell me where to put my savings, that's NONE of your business. I got out of the stock market in 2000 and DAMN glad I did; I know way too many people that have lost 75% or more of the retirement savings, and now Benny boy is inflating the rest of their savings away!!!

 

GD IDIOT and LIAR!!!

Jun 19, 2013 2:48PM
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Oooooh, panic panic, make trades, change your portfolio, the government-run fake economy spokesman has just said something!

Forget what businesses are actually doing, just what for some scraps of info from our retarded state-run economy bureaucrats, and then act on it, baby!
Jun 19, 2013 3:54PM
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It's all just a game of "Chicken" now.   How long can all of the big money guys stay in the market before one of them decides it's really time to get out. When one moves it will become a race to the doors.  Bernake has now said that it "will" end.  Now that it is a certainty, the big boys will be looking for the exits.  First one out wins!  Don't get in their way.
Jun 19, 2013 4:18PM
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The problem for the Fed is that they have backed themselves into a corner. They have artificially lowered interest rates, while at the same time, along with those in congress, have increased the deficit.

 

The conundrum is that no matter when they start raising interest rates, it will not only explode the deficit even further, but also pop the bond bubble, and  cause a business slowdown. Beyond that, in these markets, where we have so often seen trends take on characteristics exactly the opposite of what you would expect, that point of interest rate reversal may, ironically, also start causing inflation to rise. Then what do they do? Lower the rates back down to circumvent all of the unintended consequences?

 

These are the kinds of things that occur when an entity, such as a central bank, engages in market psychology and manipulates the markets through artificial demand, rather than true market driven demand, so that people will feel good about the markets. That feeling is, of course, a false feeling due to the actions of the Fed masking what levels the markets would naturally revert to if there was no such action by the Fed.

 

In a nutshell, I think it can be summed up by saying: It aint gonna be pretty.

Jun 19, 2013 3:01PM
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Looks like the market response today would be negotive either way, just differing by degrees.  Then again, most times Bernanke opens his mouth publicly it immediately results in a down day.
Jun 19, 2013 2:26PM
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Why did the market drop? I'm confused.
Jun 19, 2013 3:02PM
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That's a man with a gun in his back. it's OUR country, do we really want it run into the ground or do we want to SELL OFF and leave Ben's banks stuck with the tab for this crap? WHY are you still in when any IDIOT can see where this is headed.
Jun 19, 2013 3:19PM
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Bernanke, when will you learn to shut up .. or add a NO COMMENT in your answers. You talk to  much!!!!
Jun 19, 2013 3:05PM
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The market is supposed to dislike the unknown, ambiguous, and uncertainty.  Now that the free ride has been assigned some definite guidelines, the market DROPS 160 points.  Sounds like a bunch of free loadin' very touch a$$holes - those investors!!
Jun 19, 2013 3:16PM
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When Bernanke leaves in January he won't be blamed for what happens after "mid-2014".

I wonder what he'll be doing with his personal portfolio during those months in between.

Jun 19, 2013 2:33PM
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I'm lost. Did the two dissenters, dissent for the exact opposite reasons to each other?
Jun 19, 2013 4:54PM
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The morons who sell their stocks because they believe interest rates will rise are too stupid to be trusted with a 10 dollar per week allowance from dad.  This economy will never get of the ground until interest rates rise.  When they rise, the feds will have to stop putting us deeper and deeper in debt buying bonds with borrowed money because we will not be able to afford the interest rates on the debt.  Maybe when they stop buiding the national debt, we'll be able to move forward. And when we do, yo will see a stock rally of greater proportion than wne even Reagan was in office.  This obama bunch is the most incompetent since the Carter Administration!
Jun 19, 2013 4:12PM
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"Stocks sag when Chairman Bernanke expects the Fed to trim bond buying"

 

What?? Are you telling me that this stock market has nothing to do with fundamentals, and is artificially propped up by Ben "Dover" Bernanke?! Colour me shocked!!  <sarcasm>

Jun 19, 2013 4:28PM
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Ole Ben is stepping down in January so he don't want the train to come off the track on his watch, of course he will continue propping up the market until he clears the door on his way out. With this little tidbit of news the market is down 200 pts. can't imagine how it will react when the patient is taken off life support.

the Fed ruined the market with cheap easy air money and it will be the first time in history the Fed was the party responsible for a crash.

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