U.S. stocks, bonds slip after Federal Reserve cuts stimulus
New York • Stocks retreated modestly in afternoon trading after the Federal Reserve announced it would cut back further on its economic stimulus. Bond prices fell, sending yields higher. The central bank also set the stage for a possible interest rate increase some time next year.
KEEPING SCORE: The Dow Jones industrial average fell 26 points, or 0.2 percent, to 16,309 as of 2:25 p.m. Eastern. The Standard & Poor's 500 index was down two points, or 0.1 percent, to 1,870 and the Nasdaq composite was down six points, or 0.1 percent, to 4,327. All three indexes were basically flat before the Fed's announcement.
FED DECISION: The Federal Reserve voted to further reduce its economic stimulus program, cutting its monthly bond purchases from $65 billion to $55 billion a month. The pullback was widely expected by economists. The Fed said that despite severe winter weather in January and February, the economy had recovered enough to merit a pullback in its bond-buying program.
INTEREST RATES: In a document accompanying the decision, the Fed said the vast majority of its policymakers believe it would be appropriate for the central bank to begin to raise interest rates starting in 2015. The so-called Federal Funds rate, the Fed's main tool for regulating the health of the economy, has been near zero since 2008 in order to boost the economy.
"This statement from the Fed is as hawkish as it gets," said Tom di Galoma, head of fixed income rates at ED&F Man Capital Markets, meaning the central bank was getting ready to tighten credit after a long period of easy-money policies. "The only thing they did not do is raise rates today."
BONDS RETREAT: Bond prices fell sharply after the Fed's announcement. The yield of the 10-year U.S. Treasury note rose to 2.75 percent from 2.67 percent Tuesday. The sell-off was even more noticeable in two-year and five-year bonds. The yield on the two-year note jumped to 0.41 percent from 0.35 percent and the five-year note's yield rose from roughly 1.54 percent to 1.66 percent.
HOMEBUILDERS: KB Homes, one of the nation's largest homebuilders, jumped $1.35, or 8 percent, to $19.03 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. Other homebuilders also rose. D.R. Horton, PulteGroup and Toll Brothers gained 2 percent or more.