The US Federal Reserve has announced a further reduction to its bond purchases. The Fed is sticking to a plan to wind down its extraordinary stimulus despite recent turmoil in emerging markets.
On Wednesday, the US Federal Reserve announced that beginning in February it would buy $65 billion (89 billion euros) in bonds monthly, down from $75 billion. In the first policy meeting without a dissent since June 2011, the decision received unanimous backing - a nice sendoff for Fed Chairman Ben Bernanke, who hands the reins to Vice Chair Janet Yellen on Friday.
The Fed's committee also maintained benchmark interest rates, reiterating in Wednesday's policy statement that the near-zero level would remain "for a considerable time." US unemployment has declined but "remains elevated" at 6.7 percent, the Fed announced, while core consumer inflation for the last 12 months has remained stable, at 1.7 percent.
On the news, US government debt prices rose, with yields on the benchmark 10-year note hitting the lowest level since late November. The dollar rose against the euro, but fell against the yen.
Stocks extended their losses after the Fed further reduced stimulus. The market had already seen lows following disappointing results from Yahoo, Boeing and other companies. Economists credited bond purchases with low interest rates and high stock prices.
By late afternoon, the Dow Jones industrial average fell 182.51 points, or 1.15 percent, to 15,746.05. The S&P 500 lost 17.61 points, or 0.98 percent, to hit 1,774.89. The Nasdaq Composite dropped 44.962 points, or 1.1 percent, to reach 4,053.
Emerging markets remained under stress, with the Turkish lira staging a short-lived rally that lost steam as investors braced for the Fed's widely expected decision to reduce its bond purchases. Turkey's massive monetary tightening put pressure on the most fragile developing countries to follow suit to prevent jittery investors from running for the exits. However, not even the higher returns could prove enough to stop the exodus as the Fed continued to mop up the easy money that had flooded emerging markets over the past several years.
South Africa's rand dropped over 2 percent to 11.21 per dollar even after the central bank raised interest rates for the first time in almost six years, bringing its benchmark to 5.5 percent from 5 percent. In Turkey, where the central bank had raised rates dramatically, the lira rallied but eventually gave up gains. At Wednesday's end, it traded 0.45 percent stronger: 2.243 per dollar.
"Recent domestic and external developments are having an adverse impact on risk perceptions, leading to a significant depreciation in the Turkish lira and a pronounced increase in the risk premium," the bank had announced going into Wednesday. "The central bank will implement necessary measures at its disposal to contain the negative impact of these developments on inflation and macroeconomic stability," the institution reported.
mkg/hc (Reuters, AFP, dpa, AP)