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U.S. stocks, bonds drop after Fed cuts stimulus

Published: Wednesday, March 19, 2014 3:42 p.m. CDT • Updated: Monday, March 31, 2014 3:05 p.m. CDT
(AP Photo/Richard Drew)
Trader John Yaccarine, center, works on the floor of the New York Stock Exchange Wednesday, March 19, 2014. Stocks are slightly lower in early trading on Wall Street as traders wait for the latest policy decision from the Federal Reserve.

NEW YORK (AP) — Stocks retreated in late-afternoon trading Wednesday after the Federal Reserve announced it would cut back further on its economic stimulus. Bond prices fell, sending yields higher. The central bank and its newly-installed Chair Janet Yellen also set the stage for a possible interest rate increase some time next year.

KEEPING SCORE: The Dow Jones industrial average dropped 130 points, or 0.8 percent, to 16,205 as of 3:24 p.m. Eastern. The Standard & Poor's 500 index fell 14 points, or 0.8 percent, to 1,857 and the Nasdaq composite was down 35 points, or 0.8 percent, to 4,297. All three indexes were basically flat before the Fed's announcement at 2 p.m. Eastern time.

YELLEN: In her first press conference as Fed chair, Yellen implied that the Fed's time frame for raising interest rates was closer to the first half of 2015, sooner than many investors had expected. A decline in stock and bond prices steepened after her comments. The Dow fell as much as 209 points before erasing some of its loss.

BONDS RETREAT: Bond prices fell sharply after the Fed's announcement and Yellen's remarks. The yield of the 10-year U.S. Treasury note rose to 2.78 percent from 2.67 percent Tuesday, a large move. The sell-off was even more pronounced in two-year and five-year Treasury notes. The yield on the two-year note jumped to 0.44 percent from 0.35 percent and the five-year note's yield rose to 1.74 percent from 1.54 percent.

FED DECISION: The Federal Reserve voted to further reduce its economic stimulus program, cutting its monthly bond purchases from $65 billion to $55 billion a month, in line with what analysts were expecting. The Fed said that despite severe winter weather in January and February, the economy had recovered enough for the bank to continue reducing its bond purchases, which are aimed at keeping long-term interest rates low.

INTEREST RATES: The Fed also said that the vast majority of its policymakers believe it would be appropriate for the central bank to begin to raise short-term interest rates starting in 2015. The Federal Funds rate, the Fed's main tool for regulating the health of the economy, has been near zero since 2008 in order to boost the economy.

THE QUOTE: "This statement from the Fed is as hawkish as it gets," said Tom di Galoma, head of fixed income rates at ED&F Man Capital Markets, meaning the central bank was getting ready to tighten credit after a long period of easy-money policies. "The only thing they did not do is raise rates today."

BANK BOOST: Financial stocks did far better than the rest of the market. JPMorgan Chase, Citigroup and Bank of America. Banks, in particular big commercial banks like JPMorgan and Citi, benefit from higher interest rates because they can charge more for loans and credit card balances.

HOMEBUILDERS: KB Homes, one of the nation's largest homebuilders, jumped $1.35, or 8 percent, to $19.03 after the company reported much higher profits than investors were expecting. KB earned 12 cents a share, four cents more than analysts had forecast. The company also said the average selling price of a new home rose 12 percent from last year. Other homebuilders also rose. D.R. Horton, PulteGroup and Toll Brothers gained 2 percent or more.

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