US stocks were mixed, while the dollar and government bond yields rose yesterday, after the Federal Reserve announced the end of its stimulus programme in a statement that also notedthe improvements in the US labor market.
The Fed, as expected, said it will no longer add to its holdings of Treasury bonds and mortgage-backed secur-ities, effectively ending a programme that at its peak pumped $85 billion a month into the financial system to hold interest rates down and boost the flagging economy.
The Fed also expressed confidence in the US recovery and said it would remain on track despite a slowdown in many parts of the global economy, especially Europe. Specifically, the Fed said “underutilization of labor resources is gradually diminishing.”
That produced a notable selloff in bond markets, with a sharp move in the benchmark two-year US Treasury note, which saw its yield rise to 0.485 per cent. Should the move hold, it would be the biggest one-day rise for two-year yields in more than three years. The 10-year Treasury note fell 18/32 in price to yield 2.3479 per cent. “I was pleasantly surprised that they removed the reference to there being significant underutilization of labor resources. I think that is a hat tip to some of the progress being made in the labor market,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
Major US indexes added to declines on the announcement but then pared losses.
“The reaction was to sell (stocks) because it is a bit more optimistic than perhaps many traders were expecting it to be,” said Jacobsen. “What 'considerable time' (for the next hike) means may have been compressed a little bit.”
The US dollar jumped 0.6 per cent against a basket of major currencies after being down earlier, and rose 0.7 per cent against the euro to $1.2646.
MSCI's index of equities in 45 countries fell 0.2 per cent, erasing earlier gains. The pan-European FTSEurofirst 300 index of leading companies closed up 0.1 per cent ahead of the Fed's announcement.
The Dow Jones industrial average fell 24.23 points, or 0.14 per cent, to 16,981.52, the S&P 500 lost 6.16 points, or 0.31 per cent, to 1,978.89 and the Nasdaq Composite dropped 24.53 points, or 0.54 per cent, to 4,539.77.