4:28PM EST December 12. 2012 - Stocks ended mostly down after the Federal Reserve surprised investors with a plan to keep a key short-term rate it controls near zero until the 7.7% unemployment falls to 6.5% and the 2.2% inflation pace rises to 2.5%.
Major indexes at first rose about 0.5% after the news came out, then lost steam as Fed chief Ben Bernanke held a news conference to explain the decision less than two hours later.
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The Nasdaq lost 0.3%, off 8 points to 3,014. Ending basically flat were the Dow Jones industrial average and the SP 500, down 0.03% and up 0.01%, respectively.
In the Fed's statement, the central bank said its goal is to help spur economic growth and lower borrowing costs. Tying the Fed's short-term rate to specific inflation and unemployment rates is unprecedented, economists said.
After a two-day policy-making meeting, the Fed also announced it will continue buying $45 billion a month in Treasury bonds, and continue buying $40 billion a month in mortgage-backed bonds to stimulate the economy.
In addition, the Fed won't be selling $45 billion a month in short-term Treasury notes, as it had been doing to keep the size of its Treasury holdings stable. The Fed has launched three rounds of quantitative easing since the financial crisis hit in 2008 and it has been widely credited with shoring up financial markets.
The yield on the 10-year U.S. Treasury jumped to 1.7%, and the price fell.
The price of gold jumped 1% when the announcement was made, and then settled back to a 0.2% rise of $3.20 at $1,711.40 an ounce. Gold investors view the Fed's move to tie short-term rates to the inflation rate as a risky move. The euro rose 0.4% against the dollar at 1.3066, and the dollar weakened against the Japanese yen, trading at 83.20 Wednesday.
In overseas trading, Britain's FTSE 100 ended up 0.4% at 5,945.85, while Germany's DAX 30 finished 0.3% higher at 7,614.79, and the CAC-40 index in France closed flat at 3,646.66.
Greece will likely be a market focus again, especially Thursday when the 17 euro finance ministers meet, after the country's debt management agency said a bond buyback plan had been completed.
The agency said Wednesday that the country will buy back $41.5 billion worth of its bonds, a key part of a package of measures designed to get the country's mountainous debt back to sustainable levels over the next decade.
The successful buyback deal was a major requirement before Greece can be granted a long-delayed installment of its international bailout funds. Athens expects the $44.8 billion to be approved by its creditors Thursday.
Relief that Greece will likely get the money helped support the euro despite figures showing a surprise 1.4% monthly drop in industrial output across the 17 countries that use the euro.
Earlier in Asia, stocks posted gains in spite of Pyongyang's successful launch of a long-range rocket early in the day. The action, condemned by the U.S., South Korea and Japan, is believed to have been a test of technology seen as crucial to advancing North Korea's nuclear weapons ambitions.
Japan's Nikkei 225 index rose 0.6% to 9,581.46, its highest close since late April. Advances on the Nikkei were largely attributed to the yen's recent weakness against the dollar and the euro. Hong Kong's Hang Seng added 0.8% to 22,503.3 while South Korea's Kospi gained 0.6% to 1,975.44.
Oil prices rose on the Fed's decisions even though OPEC oil ministers are signaling that they will stick to present daily output targets of 30 million barrels at their meeting Wednesday. The benchmark New York crude oil price ended up 97 cents to $86.76 a barrel.
The Treasury auctioned $21 billion of 10-year T-notes Wednesday at 1.634%. Investors bid $2.95 for every $1 in T-notes offered – the same as the previous auction in November.
Government bond investors are on track to finish the tenth straight year without a loss. The next 10 years may not be so kind.
The Treasury auction is remarkable for how little interest the government pays on its debt, and how many people are good with that.
At the last auction, in November, investors accepted 1.63% in annual interest, an amount all the more remarkable because inflation rose 2.2% the previous 12 months. Assuming inflation continues to rise at a 2.2% pace, investors in last month's auction will see the value of their bond purchase eroded by inflation every year they own it.
Even worse, bond prices fall when interest rates rise. Those who hold individual bonds to maturity would just feel the pinch of inflation. Those in bond funds would fare much worse, because a bond fund's holdings are priced every day. As rates rise, a bond fund's price will fall.
If yields on newly issued T-notes were to rise to 5% — still less than the average 6.6% since 1962 — bond prices would crumble.
Who wants a deal like that? Apparently, quite a few. The Treasury received $2.59 in bids for every $1 in T-notes it sold. And investors have poured an estimated $295 billion into bond funds this year, says the Investment Company Institute.
Will rates stay at or below these levels for a decade? Unlikely. And if you're invested in a long-term bond fund because returns have been so good the past decade, you're likely headed for disappointment.
Contributing: USA TODAY's John Waggoner, The Associated Press
Source: http://www.news.theusalinks.com/2012/12/12/stocks-sag-on-feds-rate-policy-surprise/
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