US stocks plummet as Bernanke discusses exit strategy

Prices dropped sharply on Wall Street, with the Dow shedding over 1%, as Fed chairman Ben Bernanke suggested stimulus could begin to be scaled back towards the end of the year.

The FOMC decided to make no changes to its monthly purchases of $85 billion in securities and gave no clear timing for a reduction in the purchases in the official statement.

The language used was very similar to statements issued at recent meetings, saying the committee would closely monitor incoming data, continuing purchases until appropriate and that the Fed ‘is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.’

The initial reaction to the decision was muted, with the major benchmarks continuing to trade sideways, but stocks started to slide once Ben Bernanke’s press conference began half an hour later. In the last hour of trading the Dow Jones and the S&P 500 were both down 1%, while the NASDAQ 100 lost 0.8%.

Mr Bernanke revealed in his press conference that the committee foresaw the stimulus scheme being reduced towards the end of this year, with the reductions slowly continuing until an end to the package in the middle of 2014. He stressed that these were based on current projections and would be amended according to incoming data.

While I appreciate his candour, I’m surprised that he was so forthcoming about tapering, considering the volatility that followed his last comments regarding the matter. The sharp fall on Wall Street shows just how touchy the market is to the prospect of tapering, even with the promise that it will be timed to coincide with economic recovery.

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