NEW YORK – The Federal Reserve guessing game threw the markets for another loop Tuesday.
Comments from a Fed official raised expectations that the Fed could start easing off its support for the economy soon, sending the stock market sharply lower in the late afternoon. The market recovered in the last hour of trading to end with slight losses.
Snippets from a prepared speech by Esther George, president of the Kansas City branch of the Federal Reserve, were reported in the early afternoon. George pointed to “improving economic conditions” as well as evidence that financial markets were getting dependent on the Fed’s support. As a result, she said, “I support slowing the pace of asset purchases as an appropriate next step for monetary policy.
“History suggests that waiting too long to acknowledge the economy’s progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon,” George said, according to a prepared speech she was set to give in Santa Fe.
George didn’t give the speech because she was sick, but news outlets still reported her comments, and the Kansas City Fed posted the speech on its website.
It was the latest volatile turn in stock trading as investors try to figure out when the Fed will make a move to taper the $85 billion in bond purchases it’s making monthly to fuel the economy.
While it’s well-known that the Fed’s next step will be to pare its bond-buying, nobody is sure when that will happen. As a result, traders have been trying to out-guess each other in anticipation of the Fed’s decision, seizing on comments from bank officials and minutes from a recent meeting of policymakers to send stock and bond prices swinging sharply over the past two weeks.
The next big data point for investors is the Labor Department’s monthly employment survey due out Friday. Oddly enough, a weak report might be encouraging to stock investors since it would imply that the Fed will keep buying bonds to support the enfeebled economy.
That’s the reaction the stock market had on Monday, when traders interpreted an unexpected slowdown in U.S. manufacturing last month as the latest sign that the Fed wasn’t close to winding down its stimulus program.
“You gotta believe that people are getting ready for the end of the week,” said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
The Standard & Poor’s 500 index fell 9.04 points to close at 1,631.38, a drop of 0.6 percent. It had lost as much as 16 points, or 1 percent, around 2:30 p.m.
The Dow Jones industrial average lost 76.49 points to 15,177.54, a drop of 0.5 percent. The Dow had gained for the previous 20 Tuesdays in a row.
The Nasdaq composite fell 20.11 points to 3,445.26, down 0.6 percent.
