Stocks hammered by Fed announcement – USA TODAY
NEW YORK — Stocks were hammered Wednesday after the Federal Reserve, under its new chief Janet Yellen, said it would dial back its stimulus by an additional $10 billion per month and updated its guidance on when the central bank might start raising short-term interest rates.
The Dow Jones industrial average closed down 114.02 points, or 0.7% to 16,222.17. The Standard & Poor’s 500 and Nasdaq composite each fell 0.6%.
After the 2 p.m. ET announcement, the Dow, which had been up around 7 points, slid and was down about 150 points around 3:15 p.m.
A comment by Yellen at her first news conference suggesting the Fed could start raising short-term interest rates “six months” after it ends its bond-buying program spooked investors. Her comments were interpreted as a sign that rates would rise sooner than Wall Street had anticipated.
Whether that takeaway was accurate, it created confusion about the timing of the Fed’s exit strategy.
The big market move came in the government bond market, where prices dropped, and yields, which move in the opposite direction, rose. The yield on the 10-year Treasury jumped to 2.77%, vs. 2.68% Tuesday and 2.74% before the Fed released its statement.
The additional $10 billion per month “taper” of its bond-buying program to $55 billion per month was expected.
What investors were wrestling with was the Fed’s change to its forward guidance related to the timing and circumstances surrounding future increases on short-term interest rates, which are now roughly zero percent.
The Fed did away with its prior guidance, which was quantitative threshold based on the nation’s jobless rate. The Fed had been using a 6.5% unemployment rate as its ‘threshold” to start the process, or at least kick off the debate, about raising rates. However, with the jobless rate now at 6.7% and the rate itself viewed as a flawed measure of the actual health of the job market, the Fed opted to phase out the numerical threshold.
In its place, the Fed will assess its rate outlook using a “wide range of information,” including “measures of labor market conditions, indicators of inflation pressures and inflation expectations and readings on financial developments.”
Wall Street was still digesting what the new “qualitative” guidance means for the rate-hike timetable.
The Fed’s new “qualitative” guidance might be more market-friendly than the market’s knee-jerk reaction to the downside might indicate, says Sung won Sohn, an economics professor at California State University.
“The tilt toward the more qualitative approach would mean future monetary policy is likely to be more dovish and accommodative that it would have been under the previous guidance,” Sohn says.
Still, investors were not expecting the Fed participants upward revision to its future projections for rates, notes Paul Ashworth, chief U.S. economist at Capital Economics.
The median forecast now puts the so-called Fed funds rate at 1% by the end of 2015, up from 0.75% back in December, and 2.25% by the end of 2016, up from 1.75%.
Still, the Fed reiterated that it would keep rates “below normal levels” for a “considerable time after” it has ended its bond-buying program, which was reassuring for investors.
Yellen, the first-ever Fed chair, will hold a press conference after the end of its two-day policy meeting. It is the central bank’s first policy meeting since Janet Yellen replaced Ben Bernanke as chair.
As expected, the Fed continued to reduce its monetary stimulus at the speed it has already set, trimming its monthly bond purchases by another $10 billion. It is also expected to revise its economic forecasts.
“Forward guidance will be the most closely watched aspect of the meeting,” says market strategist Andrew Busch of The Busch Update.
KB Homes, one of the nation’s largest homebuilders, jumped 6% to $18.72 after the company reported much higher profits than investors were expecting. KB earned 12 cents a share, four cents more than analysts had forecast. The company also said the average selling price of a new home rose 12 percent from last year.
Technology giant Oracle fell 0.8% to $38.55. The database software maker reported a slight rise in revenue and profit from a year ago, but the results came in short of analysts’ predictions. Oracle’s results dragged down IBM, SAP and Microsoft.
In economic news. the nation’s current account deficit declined to $81.1 billion, or 1.9% of GDP, in the final quarter of 2013, which marks a 16-year low.
In Asia, Tokyo’s Nikkei 225 added 0.4% at 14,462.52 and China’s Shanghai composite index fell 0.2% to 2,021.73.
European shares were mixed as Britain’s FTSE 100 index was down 0.5% to 6,573.13 and Germany’s DAX index rose 0.4% to 9,277.05.
On Tuesday, the S&P 500 index rose 13.42 points, or 0.7%, to 1,872.25. The Dow rose 88.97 points, or 0.6%, to 16,336.19. The Nasdaq composite climbed 53.36 points, or 1.3%, to 4,333.31.
Contributing: Associated Press