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.
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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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!!!
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.
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.
"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>
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The solid report comes a month after the retailer closed all of its Canadian operations.
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