fled the stock market after the Federal Reserve's hawkish
statement at the end of its two-day policy meeting.
The central bank announced a reduction in its monthly bond
purchases, known as quantitative easing, by an additional $10
billion, bringing purchases to $55 billion, as expected.
The Fed said it needs to keep the policy interest rate at 0%
to 0.25% long after QE ends to achieve "maximum employment and 2%
The Fed dropped reference to the 6.5% unemployment rate target
specified in previous statements. That makes policy less
predictable, something the market dislikes.
The Fed said the labor market showed improvement but
unemployment remains high. Household and business spending
continued to improve but the housing market recovery and economic
growth slowed because of severely cold weather in the winter
Now the market expects the first rate hike to come in
"It appears that the Fed is trying to let some of the air out
of the tires, with the largest change coming from the SEP
(Summary of Economic Projections), whereby Fed officials are now
seeing at least a 1% fed funds rate at the end of 2015 and 2.25%
at the end of 2016," said Fred Bethon, managing director of
Asymmetric Risk Advisors. "Apparently this caught certain bond
traders flat-footed, especially given the recent high demand for
Treasuries due to the Ukrainian crisis."
The unemployment rate, now 6.7%, has been falling because
people have stopped looking for jobs, as the dwindling labor
participation rate indicates, and not because the labor market is
improving, says Peter Schiff, CEO Euro Pacific Capital. "Look for
(Fed Chairwoman Janet Yellen) to abandon her commitment to wind
it down to zero just as easily as she has walked back the Fed's
commitment to raise rates once unemployment hits 6.5%,"Schiff
wrote to clients.
IShares Barclays 7-10Year Treasury Bond Fund (
) fell 0.9% in the stock market to 101.40. Yields on the
benchmark 10-year government bond, which move opposite to prices,
climbed 10 basis points to 2.77%.
SPDR S&P 500 (
) fell 0.52% to 186.60, though it was down as much as 1% before
rallying near the close.IShares MSCI EAFE Index (
), tracking developed foreign markets, tumbled 1.3% to
65.2.IShares MSCI Emerging Markets Index (
) plunged 2.2% to 38.58.
SPDR Gold Shares (
) fell 2% to 128.10. It appears to be a normal pullback after
outperforming the stock market for three months. GLD has rallied
12% in that period while SPY added 3%.
Outlook For Gold
"With over 40 elections globally in 2014 and unrest growing in
many areas of the world, investors are seeking out gold this year
to serve as a ballast in portfolios," said Dave Mazza, head of
ETF investment strategy at State Street, via email.
Gold prices will likely pull back to the 200-day moving
average and rebound, Florian Grummes, an analyst, wrote in Midas
Touch Gold & Silver Update Wednesday.
He believes the bursting of China's credit bubble looms, and
if China's wealthy elite move just 5% of their money into gold,
Russians, who have lost 10% of their wealth from the ruble's
depreciation this year, may flock to gold to preserve their
wealth, he added.