While you were sleeping: stocks, bonds drop on Fed outlook

Wall Street declined, as did US Treasuries, after Federal Reserve chairman Ben Bernanke said the central bank may begin tapering its $US85 billion a month bond-buying programme later this year if the economy strengthens in line with expectations.

Mr Bernanke, who spoke at a press conference after a scheduled two-day meeting of the Federal Open Market Committee, also said the Fed might end the bond-buying programme by mid-2014.

"The committee sees the downside risks to the outlook for the economy and the labour market as having diminished since the fall," the FOMC said in a statement, adding that "inflation over the medium term likely will run at or below its 2 percent objective".

Policymakers lowered their forecasts for the unemployment rate and inflation, predicting a jobless rate of 7.2 percent to 7.3 percent this year, down from 7.3 percent to 7.5 percent in their March projection. They expect the unemployment rate to drop to 6.5 percent to 6.8 percent next year, compared with 6.7 percent to 7.0 percent in March.

"If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year," Mr Bernanke said.

"If the subsequent data remains broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year."

For now, the Fed will continue to purchase mortgage-backed securities at a pace of $US40 billion a month and longer-term Treasury securities at a pace of $US45 billion a month.

The Fed said it will keep its key interest rate at between zero to 0.25 percent as long as the unemployment rate remains above 6.5 percent and as inflation is expected to remain below 2.5 percent.

"If the economic growth we have is sustainable without the Fed, that's good news," Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio, told Reuters. "But it is hard to wean the system off the easy money."

In late afternoon trading in New York, the Dow Jones Industrial Average fell 0.95 percent, the Standard & Poor's 500 Index declined 0.53 percent and the Nasdaq Composite Index slid 0.39 percent.

US Treasuries also dropped, pushing yields on the 10-year note up to 2.31 percent.

"The Fed's walking a tightrope here," George Rusnak, national managing director of fixed-income strategies for Wells Fargo Private Bank in Philadelphia, told Bloomberg News.

"They're balancing preparing the markets that tapering is going to begin, but at the same time comforting them that it's not going to be too dramatic and too quick to be disruptive. It's a fine line."

The greenback strengthened, gaining 0.8 percent against the euro and rising 1.6 percent against the Japanese yen.

In Europe, the benchmark Stoxx 600 Index fell 0.2 percent from the previous close. The UK's FTSE 100 closed 0.4 percent lower, as did Germany's DAX. France's CAC 40 weakened 0.6 percent.

(BusinessDesk)