The US central bank is probably going to end its massive bond-buying program this fall and could start raising interest rates around six months later, US Federal Reserve Chair Janet Yellen said on Wednesday, in a comment which sent stocks and bonds tumbling.
The Dow Jones Industrial Average fell 114.02 points, or 0.7 percent, to 16,222.17, the S&P 500 lost 11.48 points, or 0.61 percent, to 1,860.77, and the NASDAQ Composite dropped 25.711 points, or 0.59 percent, to 4,307.602.
In Asia trading yesterday, Tokyo dropped 1.65 percent, or 238.29 points, to 14,224.23, Sydney gave up 1.15 percent, or 61.6 points, to 5,294 and Seoul fell 0.94 percent, or 18.16 points, to close at 1,919.52.
Shanghai closed 1.4 percent lower, giving up 28.26 points to 1993.48, while Taipei closed 1.06 percent, or 92.13 points, lower at 8,597.33.
Yellen’s remarks at her first press conference as the head of the central bank pointed to a more aggressive path toward higher interest rates than many had anticipated and bets in financial markets shifted accordingly.
The comments came after a two-day meeting in which Fed officials made another reduction in their bond-buying stimulus and decided to jettison a set of guideposts they were using to help the public anticipate when they would finally raise interest rates.
The Fed said the change in its rate increase guidance did not mark a shift in its intentions and that it would wait a “considerable time” after shuttering its asset-purchase program before pushing borrowing costs higher.
Yellen, who had fielded numerous questions without a hitch, hesitated when asked what the Fed meant by “considerable.”
“I, I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing, but, you know, it depends — what the statement is saying is it depends what conditions are like,” Yellen said.
Several analysts wondered whether her answer was an unintended slip, given the deliberately vague language of the Fed’s statement.
“The forecast change could be interpreted as a relatively hawkish shift... and as such the general market reaction seems well-founded,” JPMorgan economist Michael Feroli said.
However, most top Wall Street economists continued to see the first rate increase in the second half of next year, according to a poll.
Yellen sought to use her press conference to emphasize that rates would stay low for a while and rise only gradually. She also said they could end up staying lower than normal “for some time,” even after the unemployment rate drops to a healthy level.
The Fed would look not only at how close inflation and unemployment are to its goals, but how fast, or slowly, those measures are approaching those goals, she said.
At 6.7 percent, the unemployment rate is well above the 5.2 percent to 5.6 percent range Fed officials see as in keeping with full employment. The central bank’s favored inflation gauge is barely more than half of its 2 percent target.
The Fed has held interest rates near zero since late 2008 and has pumped more than US$3 trillion into the economy with its bond purchases to try to foster a stronger recovery.
Of the Federal Reserve’s 16 policymakers, only one believes it will be appropriate to raise interest rates this year, 13 expect a first rate increase next year and two others see the first rate increase coming in 2016, according to the new forecasts.
However, once rate increases start, Fed officials see slightly sharper increases than they did in December last year, when they last issued forecasts. They now see rates ending 2016 at 2.25 percent, a half percentage point above their previous projections.