U.S. stocks sold off sharply on Wednesday after Federal Reserve chairman Ben Bernanke hinted the central bank might soon halt its $85-billion-a-month bond-buying stimulus program.
The Dow Jones Industrial Average lost 130 points soon after Bernanke's news conference began a little after 2 p.m. The American stock benchmark had earlier been slightly higher on the day.
The uncertainty was good for bond investors, as the yield on the 10-year Treasury bill went up 10 basis points to 2.31 per cent from 2.21 per cent in reaction.
What moved markets was the language of the Fed's statement. Though the central bank often speaks in a cryptic way, the overall tone was definitely a more dovish one — a sign the Fed is getting ready to withdraw the emergency measures that have been propping up equity markets lately.
In its statement, the Fed said the economy is growing moderately.
For the first time, it said the "downside risks to the outlook" had diminished since fall. The Fed reiterated it plans to keep the stimulus program in place until unemployment goes below 6.5 per cent and stays there, but recent signs from the U.S. economy suggest that could be getting closer.
The American economy has averaged 196,500 new jobs per month since the bond-buying program began in October, as opposed to an average of 157,000 a month in the eight months before that.
Timothy Duy, a University of Oregon economist who tracks the Fed, called the statement "an open door for scaling back asset purchases as early as September."
Wall Street had risen steadily through the first half of the week on the expectation that the Fed was going to say it had no plans to cancel its stimulus program any time soon.
Chairman Ben Bernanke said the Fed could start scaling back its $85 billion in monthly bond purchases later this year if the economy continues to improve. He said the reductions would occur in "measured steps" and that the purchases could end by the middle of next year.
Bernanke likened any reduction in the Fed's bond purchases to a driver letting up on a gas pedal rather than applying the brakes. "The fundamentals look a little better to us," Bernanke said.