Stocks Tumble as Fed Outlines Criteria for Reducing Stimulus
NEW YORK ( TheStreet) -- Major U.S. stock markets turned sharply lower on Wednesday despite the Federal Reserve saying it will maintain its current stimulus program of buying $85 billion per month to help sustain the country's economic recovery.
The Fed's Federal Open Market Committee voted to maintain its current policy by a vote of 10 in favor and 2 against but outlined criteria which will determine when the bank begins to reduce the size and scope of its bond buying program.
"On a day like today you have so many traders taking positions out there, and one possible explanation is that you had traders who thought they would give more dovish language around keeping the current policy in place," said David Roda, regional chief investment officer for the southeast at Wells Fargo Private Bank.
But while the bank said policy would be unchanged for the present, Fed Chairman Ben Bernanke said that as economic conditions improve, the bank will look to reduce its stimulus measures.
Bernanke said that the bank would take steps to curb the program when the bank determines that the economy has made "substantial progress,'' a determination that would likely require a drop in the unemployment to 7% or below. The bank has not "fixed" timeline on when it might curb its bond purchases depending on "what happens in the economy," Bernanke said.
Bernanke said the committee sees the economy growing at a "moderate pace," but that unemployment "remains elevated" at 7.6%. Bernanke said the bank "may vary the pace" of its bond purchases depending on how well the economy is improving.
The central bank, in a statement, said "downside risks to the outlook for the economy and the labor market as having diminished since the fall." The bank's committee said it expects inflation over the "medium term" to be at 2% or below while keeping the federal funds rate at 0 to 0.25%.
Bank presidents voting in opposition were Esther George and James Bullard, who the bank said argued that the committee "should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings."
Bill Gross, founder of Pacific Investment Management, the world's biggest bond fund, said in an interview on CNBC that the Fed "deferred" reducing its bond buying probably until the end of the year. Gross said he expects the government's 10-year bond to be at 2% or lower by year's end.
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