The U.S. stock market took a hit Wednesday, following comments from new Federal Reserve Chairwoman Janet L. Yellen that had suggested an increase in short-term interest rates about six months or so following the ceasing of economic stimulus.
In its most recent policy meeting, the Fed had decided on a paradigm shift of sorts, dropping the U.S. unemployment rate as the central bank’s primary benchmark for ascertaining the strength of the broader economy. Instead, the Fed will make use of a far wider range of statistics as variables that may or may not predicate an increase in interest rates. Most notably, stocks started dropping when Yellen clarified the “considerable period” she had referred to previously as a six-month span from the time the Fed puts an end to its bond-buying stimulus initiative to the time when it increases interest rates. The program, known colloquially as “QE3”, has been in place since September 2012, and was, up until December of last year, made to the tune of $85 billion worth of bond purchases per month.
Since the start of the year, the Fed had started “tapering” its bond purchases at a pace of $10 billion per month, and is expected to completely put an end to stimulus by the end of the year. If Yellen’s comments are to be taken literally, this could mean a rate hike sometime in quarter two 2014, which is much sooner than what most prognosticators had expected – a rate increase in the second half of 2015. Bond purchases were recently tapered by another $10 billion from $65 billion to $55 billion per month.
“(Yellen) certainly moved it up a little bit, and I don’t think the market was expecting that at all because she is widely viewed as being more on the dovish side of the aisle than she is on the hawkish side,” postulated Clearpool Group Chief Executive Peter Kenny, echoing a common sentiment among number-crunchers. “That is not a particularly hawkish comment, but the fact of the matter is, it was not expected.” Prior to Yellen making her comments, many had opined that any Fed policymaker comments regarding interest rate hikes need to be made with a sufficient amount of gravitas, so as not to upset world markets, including the U.S. stock market.
Statistics from BATS Global Markets show that trading volume Wednesday was light, as approximately 6 billion shares were traded in the American stock market, a slight decrease from the current average of 6.7 billion shares traded per day. The Dow Jones Industrial Average lost 114.02 points (0.70 percent) to close Wednesday’s trading at 16,222.17, while the S&P 500 index lost 11.48 points, or 0.61 percent, and ended the day at 1,860.77. Lastly, the tech-heavy NASDAQ Composite index slipped back by 25.711 points, or 0.59 percent, and closed trading at 4,307.602. The easing of geopolitical concerns had been the primary variable boosting equities at the start of the week, despite light trading volume.