Wall Street Dives as Bernanke Says QE Could End Next Year

Michael Teague  |

Stocks capitulated on Wednesday at the conclusion of the much anticipated Federal Open Market Committee meeting.

The FOMC said that it would continue its $85 billion monthly asset purchases, and reiterated that it would adjust those purchases according to job market and inflation forecasts. Furthermore, the Fed said once again that its historic low target interest rate would remain unchanged until unemployment drops below 6.5 percent, and inflation hits 2.5 percent.

The Fed’s insistence on maintaining the status quo for the near-term, however, was no safeguard against the market reaction to Chairman Ben Bernanke’s comments after the meeting. At a Washington D.C. press-conference, Bernanke floated a basic outline of how the Federal Reserve has envisioned the inevitable end of its massive fiscal stimulus program, as well as the time-frame in which it would like to see the exit from quantitative easing take place.

Bernanke said that if the central bank’s current economic growth forecasts remain as they are, the Fed could “moderate” the pace of asset purchases by the end of 2013, to eventually conclude them around mid-2014.

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The Chairman’s comments sent the S&P 500 down 1.39 percent to finish at 1,628.93 points, while the Dow dropped 1.35 percent to finish at 15,112.19, and the Nasdaq was off 1.12 percent to 3,443.20.

While speculation about the end of QE has reached a fever-pitch since May, Bernanke’s comments on Wednesday marked the first time the Fed has provided a concrete idea of when and how it would change its current monetary policy.

The chairman’s assertion that “If you draw the conclusion that I just said that our policies -- that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,” was far too little to calm investors and the market in general, as was his assertion that an interest rate increase was “far in the future”.

All 30 of the Dow’s components ended the day in the red, though some companies fared well despite the sell-off immediately sparked by the comments from the FOMC and the Chairman. Adobe Systems Inc. (ADBE) was up 5.58 percent to $45.78 after releasing a strong Q2 earnings report early in the day, while Netflix (NFLX) jumped 1.5 percent to $232.21 after announcing that it would be expanding its streaming video service to the Netherlands.

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