(Photo: Alex Wong, Getty)
Stocks plunged lower on Wall Street in afternoon trading after Federal Reserve policymakers announced no change in the Fed bond-buying program but gave a slightly more optimistic outlook for the U.S. economy.
The Fed said "downside risks" to its outlook for the economy and job market have "diminished," which investors interpreted as a sign that the Fed would start to dial down its bond-buying program later in the year.
The downdraft continued after Federal Reserve Chairman Ben Bernanke laid out a possible roadmap for reducing and then ending the bond purchases at a news conference following the meeting.
If the economy and job market continue to improve, Bernanke said a gradual tapering down of the bond purchases could begin "later this year" with continued reductions next year until they stop in mid-2014, assuming the unemployment rate, now 7.6%, falls to about 7% by then.
However, Bernanke emphasized that such a strategy depends on the economy and job market. If they falter, the Fed could stop scaling back the bond purchases or even increase them again.
The Dow Jones industrial average, which was down about 0.1% before the announcement, was down about 185 points, or 1.2%, in late afternoon trading. The broader Standard & Poor's 500 index was down 1.2% and the Nasdaq composite index fell 1.0%.
The yield on the benchmark 10-year Treasury note jumped to 2.32%, up from 2.18% Tuesday.
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"On the margin it is a more hawkish (or less market-friendly) statement," said Eric Stein, co-director of global income at Eaton Vance Management, adding that when and how aggressive the Fed reduces its stimulus program will remain "data dependent."
Stein says based on the Fed's upgrade of its outlook for jobs and economic growth, the Fed could start dialing back its bond-buying as early as its September meeting, but says he thinks it will be later in the year.
Recently investors have feared that the Fed would start pulling back on its $85 billion in monthly purchases of mortgage-backed bonds and long-term U.S. Treasuries, a policy that has pushed borrowing rates near record lows and been a boon for stock prices.
In recent weeks, communications from the Fed has sent confusing messages about the timing and pace of the end of the market-friendly bond purchases.
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Before the announcement, some experts feared the market is at risk of overreacting to the Fed's decision about when to cut back.
Just because the Fed is considering the start of a shift from loose monetary policy to tighter policy is not reason for investors to overreact, says Kevin Pleines, an analyst at Birinyi Associates.
"For the long-term investor a change in Fed policy is not a reason to panic," says Pleines, adding that the start of a less-easy Fed policy does not "necessarily coincide with a market peak or beginning of a recession."
NDR data over the past 50 years show that bear markets, on average, don't start until 24 months after the start of Fed tightening. The broad U.S. market has been up 3.4% on average, and positive 73% of the time a full year after the Fed eases up on stimulus.
Overseas, stocks in Hong Kong, mainland China and Seoul went south on Tuesday. Hong Kong's Hang Seng index closed down 1.1% to 20,986.89, while South Korea's KOSPI index shed 0.7% to 1,888.31. However, Japan's Nikkei 225 stock average bucked the downward trend in Asia, adding 1.8% to 13,245.22.
In Europe, Britain's FTSE 100 index finished down 0.4% at 6,349, and France's CAC 40 index closed down 0.6% to 3,839. Germany's DAX 30 index ended down 0.4% at 8,197.
Contributing: The Associated Press