September 17, 2019

Shares Drop as Traders Try to Guess the Fed’s Next Move

The Federal Reserve guessing game threw the markets for another loop on 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 the official, Esther L. George, president of the Kansas City, Mo., branch of the Federal Reserve, were reported in the early afternoon. Ms. 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,” Ms. George was to say in the speech in Santa Fe, N.M. She did not give the speech because she was sick, but news outlets reported her comments, and the Kansas City Fed posted the speech online.

It was the latest volatile turn in stock trading as investors try to figure out when the Fed will make a move.

The Fed’s next step will be to pare down its bond-buying, but when that will happen is unknown. As a result, traders have been trying to outguess one another in anticipation of the decision, seizing on comments from bank officials and minutes from a recent meeting of policy makers to send stock and bond prices swinging sharply over the last two weeks.

The next big data point for investors is the Labor Department’s monthly employment survey, which is to be released on Friday. A weak report might be encouraging to stock investors since it would imply that the Fed would keep buying bonds to support the economy.

That was the stock market’s reaction on Monday, when traders interpreted an unexpected easing in American manufacturing last month as a sign that the Fed was not close to winding down its stimulus program.

“You’ve got to believe that people are getting ready for the end of the week,” said James W. Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

The Fed’s bond purchases have helped keep bond prices high and the yields they pay low. The Fed’s goal is to encourage borrowing and investing with low interest rates.

Many investors expect long-term interest rates to rise when the Fed scales back its bond-buying. If they climb high enough, more investors might be tempted to buy bonds instead of stocks. Trying to anticipate that outcome, many traders are pre-emptively selling stocks on the slightest signs that the Fed could be closer to slowing its stimulus.

The current yield of 2.15 percent on the benchmark 10-year Treasury note is low by historical standards. The yield rose from 2.13 percent on Monday, after the note fell 6/32, to 96 14/32, on Tuesday. It is nearly identical to the average dividend payment of 2.14 percent for stocks in the Standard Poor’s 500-share index.

The S. P. 500 fell 9.04 points to close at 1,631.38, a loss of 0.6 percent. It had lost as much as 16 points, or 1 percent, around 2:30 p.m. Other major market indexes also fell.

The Dow Jones industrial average lost 76.49 points to 15,177.54, a drop of 0.5 percent. It had been down as much as 153 points earlier in the day. 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. The price of crude oil slipped 14 cents, to $93.31 a barrel, and gold fell $14.60, to $1,397.10 an ounce.

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