Higher interest rates talk spooks stocks

Published on NewsOK Modified: March 19, 2014 at 4:51 pm •  Published: March 19, 2014
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NEW YORK (AP) — Higher interest rates are coming. And they are coming sooner than you think.

That's the message investors took away from the Federal Reserve on Wednesday. In response, they sent stocks and gold prices lower and bond yields sharply higher.

The Dow Jones industrial average lost 114.02 points, or 0.7 percent, to 16,222.17. The Dow fell as much as 209 points before erasing some of its loss.

The Standard & Poor's 500 index dropped 11.48 points, or 0.6 percent, to 1,860.77 and the Nasdaq composite lost 25.71 points, or 0.6 percent, to 4,307.60.

The Fed voted to cut its monthly bond purchases from $65 billion to $55 billion, in line with what analysts were expecting. Despite severe winter weather in January and February, the Fed said economy had recovered enough for it to continue reducing the bond buys, which are aimed at keeping long-term interest rates low.

The Federal Reserve also said the vast majority of its policymakers believed it would be appropriate for the central bank to raise short-term interest rates starting in 2015. The Federal Funds rate, traditionally the Fed's main tool for regulating the health of the economy, has been near zero since late 2008.

Investors have grown used to an easy-money policy from the Fed for more than five years now. Higher interest rates would mean the economy is improving, but it also raises the cost of borrowing money for everyone, from companies borrowing to expand their businesses to consumers looking at a mortgage. At the same time, if the Fed kept interest rates for too low for too long it could cause the U.S. economy to overheat and experience inflation.

"We think they are acknowledging for the first time that short-term rates will rise in the future," Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ, wrote in an e-mail to clients. "And that future is not that far away. A normal economy will need a normal interest rate."

Traders were also confused after newly appointed Fed Chair Janet Yellen implied that the Fed's time frame for raising interest rates was closer to the first half of 2015, sooner than many had expected.

At a press conference, Yellen was asked how much time would need to pass between when the Fed ends its bond-buying program — which is expected to end in the second half of 2014 — and when the Fed would raise interest rates. Yellen responded that the Fed could consider raising interest rates in "six months or that type of thing" from when the bond-buying program would end.