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Fed Cutting Wall Street Stimulus

Fed Cutting Wall Street Stimulus

The Federal Reserve used its final meeting under Chairman Ben Bernanke this week to make another reduction in its bond-buying stimulus program.  The Fed will reduce its monthly purchase of bonds from $75 billion down to $65 billion.  This marks the second straight month the Fed has cut the stimulus by $10 billion, as it continues to ease down the program due to an improving economy.  "Pretty much was as expected," says analyst Steve Russolillo with the Wall Street Journal.  He tells KTRH that investors have seen this "tapering" of the stimulus program coming for awhile, so they should be prepared for it.

More surprising to market analysts was what was not included in the Fed meeting.  "They did not mention any of the turmoil that's going on in the emerging markets, whether it be Turkey or South Africa," says Russolillo.  "You're seeing their currencies just get absolutely pummeled right now."  He sees that trouble in emerging markets, more than the easing of the stimulus, as the main driver of the recent slide in the U.S. markets.  "Until something stops the carnage in the emerging markets, I think it's going to get worse before it gets better," says Russolillo.  The markets did not react well to Wednesday's Fed announcement, as the Dow slid another 190 points by the end of the trading day, and the other indexes also saw double-digit declines.  "The Dow is now down more than five percent for the month, and the S&P 500 is close to that as well," explains Russolillo.

One thing the Fed did not change at this week’s meeting was long-term interest rates, which remain at the zero-to-a-quarter-percent level.  The Board has said it will not raise that rate until the national unemployment rate drops below 6.5%.  In December, the jobless rate was at 6.7%.  The bottom line, according to Russolillo, is that investors should lower their expectations for 2014 after getting spoiled with a nearly non-stop climb in the markets last year.  "It's only January right now so lots of things could happen," he says.  "But I think that the road ahead certainly is going to be much more difficult than it's been perhaps in the past few years."

 

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