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| Fed Fears Shake Global Markets but Fade on Wall St. | Fed Fears Shake Global Markets but Fade on Wall St. |
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| Investors are contemplating a future without support from one of the biggest engines of the global economy in recent years: the Federal Reserve. | Investors are contemplating a future without support from one of the biggest engines of the global economy in recent years: the Federal Reserve. |
| Fears that the Fed is about to reduce its stimulus helped send stock, bond and currency prices on a wild ride on Wednesday and Thursday, with Japanese stocks experiencing their worst one-day decline since the 2011 tsunami and United States indexes slumping before ending the day down slightly. | Fears that the Fed is about to reduce its stimulus helped send stock, bond and currency prices on a wild ride on Wednesday and Thursday, with Japanese stocks experiencing their worst one-day decline since the 2011 tsunami and United States indexes slumping before ending the day down slightly. |
| Japan’s losses were fed in part by disappointing data on the Chinese economy. Around the world, though, traders debated the significance of the statement made on Wednesday before Congress by the Fed’s chairman, Ben S. Bernanke, that a change could come in “the next few meetings” of the central bank’s policy-setting committee. | Japan’s losses were fed in part by disappointing data on the Chinese economy. Around the world, though, traders debated the significance of the statement made on Wednesday before Congress by the Fed’s chairman, Ben S. Bernanke, that a change could come in “the next few meetings” of the central bank’s policy-setting committee. |
| The stimulus programs initiated by Mr. Bernanke have helped feed a four-year rally in United States stock prices and inspired other central banks to follow suit. But even fans of the Fed’s efforts have said that the size and scope of the stimulus make it hard to know what will happen once the Fed begins to take its foot off the gas, paving the way for unanticipated consequences and more market volatility. | |
| “There are no neat answers, because we’ve never been in this situation before,” said Marshall Front, co-founder of the money manager Front Barnett Associates, who has been preparing his firm’s portfolios for uncertainty. | |
| Fed officials are aware of the confusion that lies in store and have emphasized that any changes are still a ways off and likely to be carried out slowly. The president of the St. Louis Federal Reserve Bank, James Bullard, said in a speech in London on Thursday that even after the central bank begins to slow monetary stimulus, policy makers could step in again if the economy seems to falter. | |
| The nerves of at least some American investors were calmed by the end of Thursday. After starting the day down more than 1 percent, the Standard & Poor’s 500-stock index recovered to finish the day down 0.3 percent, or 4.84 points, at 1,650.51. The Dow Jones industrial average dropped 0.1 percent, or 12.67 points, to close at 15,294.50. The Nasdaq composite index fell 3.88 points, or 0.1 percent, to 3,459.42. In the market for United States government bonds, the price of the benchmark 10-year Treasury rose 6/32, to 97 20/32, and the yield fell to 2.02 percent from 2.04 late on Wednesday. | The nerves of at least some American investors were calmed by the end of Thursday. After starting the day down more than 1 percent, the Standard & Poor’s 500-stock index recovered to finish the day down 0.3 percent, or 4.84 points, at 1,650.51. The Dow Jones industrial average dropped 0.1 percent, or 12.67 points, to close at 15,294.50. The Nasdaq composite index fell 3.88 points, or 0.1 percent, to 3,459.42. In the market for United States government bonds, the price of the benchmark 10-year Treasury rose 6/32, to 97 20/32, and the yield fell to 2.02 percent from 2.04 late on Wednesday. |
| Other stock markets were hit harder. In Tokyo, the benchmark Nikkei index suffered a 7.3 percent rout. Leading indexes were down about 2.1 percent in Germany, France and Britain. | Other stock markets were hit harder. In Tokyo, the benchmark Nikkei index suffered a 7.3 percent rout. Leading indexes were down about 2.1 percent in Germany, France and Britain. |
| Speculation that the Fed will slow its monthly purchases of government bonds has been growing for months. Investors have known that the central bank’s efforts could not continue forever, and many asset managers have begun to prepare their portfolios for the day when the Fed pulls back. | Speculation that the Fed will slow its monthly purchases of government bonds has been growing for months. Investors have known that the central bank’s efforts could not continue forever, and many asset managers have begun to prepare their portfolios for the day when the Fed pulls back. |
| Mr. Front’s firm has sold all of its long-term bonds to reduce exposure to any future changes in interest rates, and it no longer holds any Treasury bonds. In a more optimistic vein, the firm has been shifting money into riskier stocks on the assumption that rising interest rates will be accompanied by growing economies around the world. | Mr. Front’s firm has sold all of its long-term bonds to reduce exposure to any future changes in interest rates, and it no longer holds any Treasury bonds. In a more optimistic vein, the firm has been shifting money into riskier stocks on the assumption that rising interest rates will be accompanied by growing economies around the world. |
| Before this week, even many close Fed watchers assumed that any change would not come before the end of the year. But Mr. Bernanke’s comments on Wednesday led many strategists to bump up their forecasts a few months to September. | Before this week, even many close Fed watchers assumed that any change would not come before the end of the year. But Mr. Bernanke’s comments on Wednesday led many strategists to bump up their forecasts a few months to September. |
| “This might be closer than we thought,” said John Bellows, a former Treasury Department official who now works at Western Asset. | “This might be closer than we thought,” said John Bellows, a former Treasury Department official who now works at Western Asset. |
| When the Fed does shift gears, Mr. Bernanke has indicated, the process will be gradual and will begin with a slow tapering of bond purchases. Even that will commence only if the labor market grows stronger and unemployment falls further. | When the Fed does shift gears, Mr. Bernanke has indicated, the process will be gradual and will begin with a slow tapering of bond purchases. Even that will commence only if the labor market grows stronger and unemployment falls further. |
| The economic data coming out of the United States on Thursday showed slight signs of improvement. The number of people who filed for unemployment benefits last week was 340,000, lower than analysts had expected and lower than the week before. And the number of new homes sold rose more than expected, to the highest level since 2010. | The economic data coming out of the United States on Thursday showed slight signs of improvement. The number of people who filed for unemployment benefits last week was 340,000, lower than analysts had expected and lower than the week before. And the number of new homes sold rose more than expected, to the highest level since 2010. |
| The housing market has been one of the biggest beneficiaries of the Fed’s purchases of government and mortgage-backed bonds. When the Fed slows the purchase of those bonds, other investors may become less eager to buy the bonds, and mortgage rates could rise for prospective homeowners, exerting a new drag on the housing market. | |
| The way that investors respond to the Fed’s changing policy will determine how the economy is affected. That will be hard to predict even for the smart minds at the Fed, said William O’Donnell, the head of Treasury bond strategy at RBS Securities. | The way that investors respond to the Fed’s changing policy will determine how the economy is affected. That will be hard to predict even for the smart minds at the Fed, said William O’Donnell, the head of Treasury bond strategy at RBS Securities. |
| “We’ve supported the Fed’s actions for a long time,” Mr. O’Donnell said. “But we’ve long harbored fears that the exit is likely to be messy with lots of unintended consequences.” | “We’ve supported the Fed’s actions for a long time,” Mr. O’Donnell said. “But we’ve long harbored fears that the exit is likely to be messy with lots of unintended consequences.” |
| The harshest critics of the Fed are worried that a change in policy could pop what some believe to be an artificially inflated bubble in stock prices. But even many investors who expect further volatility do not expect any significant reversal in the big market rally of the last few years. | The harshest critics of the Fed are worried that a change in policy could pop what some believe to be an artificially inflated bubble in stock prices. But even many investors who expect further volatility do not expect any significant reversal in the big market rally of the last few years. |
| Peter C. Andersen, a portfolio manager at Congress Asset Management, has been buying growth-oriented stocks in preparation for another rise in the stock market. He noted that the Fed was likely to let interest rates rise only if the economy was improving, which would in turn help American stocks. Mr. Anderson added that the Fed was giving markets plenty of notice of even small changes in policy. | Peter C. Andersen, a portfolio manager at Congress Asset Management, has been buying growth-oriented stocks in preparation for another rise in the stock market. He noted that the Fed was likely to let interest rates rise only if the economy was improving, which would in turn help American stocks. Mr. Anderson added that the Fed was giving markets plenty of notice of even small changes in policy. |
| “They’ve been exceptionally good at communicating their intentions,” Mr. Anderson said. | “They’ve been exceptionally good at communicating their intentions,” Mr. Anderson said. |
| Whatever the uncertainty in the United States, the picture is even murkier overseas. The Japanese government, which has been trying to follow the Fed’s lead in stimulating its own economy, faced a setback on Thursday in the plummet of the Nikkei. Shares in Tokyo appeared headed for a rebound Friday, with shares jumping over 500 points, or 3.5 percent, in the first 10 minutes of trading. | |
| Thursday’s drop was a sharp reversal for a stock market that has been one of the world’s best performers this year, thanks to the energizing effect of Prime Minister Shinzo Abe’s economic shock therapy. | |
| There was disagreement about what had caused the dive. The Fed took some of the blame, as did the release of data on China’s manufacturing sector. The China purchasing managers’ index, released by HSBC, fell to 49.6 points in May from 50.4 a month earlier, suggesting a slowdown in the Chinese economy, the world’s largest after the United States. A reading below 50 signals a contraction. | There was disagreement about what had caused the dive. The Fed took some of the blame, as did the release of data on China’s manufacturing sector. The China purchasing managers’ index, released by HSBC, fell to 49.6 points in May from 50.4 a month earlier, suggesting a slowdown in the Chinese economy, the world’s largest after the United States. A reading below 50 signals a contraction. |
| China’s slowing momentum has been, to some extent, deliberately engineered by the authorities in Beijing, who are trying to balance the pace of growth. Still, disappointments over the performance of China’s economy — the second largest in the world after that of the United States — remain liable to unsettle markets around the globe. | |
Bettina | David Jolly contributed reporting from Paris, Hiroko Tabuchi from Tokyo, and Bettina Wassener from Hong Kong. |