Stock Market Falls Again After Federal Reserve Announcement

The stock market fell again on Thursday, a day after Federal Reserve Chairman Ben Bernanke outlined plans to phase out the Fed's stimulative bond-buying program. The Dow was down 350 points in late afternoon trading.

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MELISSA BLOCK, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

ROBERT SIEGEL, HOST:

And I'm Robert Siegel.

Stocks took another big slide today. The Dow Jones Industrials and the S&P 500 had their biggest point losses in more than a year and a half. The slide began yesterday when Federal Reserve Chairman Ben Bernanke said the Fed could begin dialing back its economic stimulus later this year.

NPR's John Ydstie joins us now. And, John, the stock indexes were down more than 1 percent yesterday, more than 2 percent today. What's going on here?

JOHN YDSTIE, BYLINE: Well, Robert, investors and traders are saying that the market is still digesting the Fed's message that it will begin dialing back its stimulus because it looks like the economy is strong enough to get along without it. So one of the calculations that investors are making is whether the Fed is right and the economy is strong enough to move ahead with dwindling Fed support.

I think today we've seen that a lot of investors have concluded it's not, and so they're betting the economy may slow. That would hurt company profits, which are the foundation of stock prices, so those investors decided it's time to sell.

SIEGEL: But, in fact, Bernanke said yesterday that if the economy does not slow down, then the Fed will not end its support.

YDSTIE: Yes, he did. But the market players kind of ignored that. They don't do nuance very well, much to the chairman's frustration. But there's another factor here besides economic growth, and that is this: the Fed is currently pumping $85 billion a month into the financial system through its bond purchases and trillions of dollars over the past five years. A lot of that money has found a home in the stock market and helped push the indexes up to record highs.

So now, if the Fed starts dialing back those cash injections - tapering is the current market term - can high stock prices be supported? Well, many investors believe they can't, so they're selling now. In fact, some folks are calling it the taper tantrum.

(LAUGHTER)

SIEGEL: And also presumably, if the Fed weren't buying up all the bonds in the country, then interest rates might go up and the bond market would be more attractive.

YDSTIE: That's right.

SIEGEL: We've seen some big market declines in recent months, but investors always seem to decide the next day or a couple of days later that there are now bargains to be had and prices go back up. This could happen again this time?

YDSTIE: You know, it's hard to tell. I think it's true that the U.S. economy is on firmer footing than it's been for a while. Housing is recovering. State and local governments are in a much better shape. The economy is weathering the federal budget cuts of the sequester better than many had expected. Chairman Bernanke pointed all this out yesterday.

But globally, things are still dicey. Europe remains in recession. There are continued signs of slowing growth in China. In fact, there was another report to that effect today, and that played a role in the stock market's big slide. The problem is if China's growth slows, it hurts the profits for U.S. exporters.

SIEGEL: Even so, though, it does seem ironic on its face that what has set off this two-day decline is essentially a fairly positive message from the Fed chairman.

YDSTIE: You know, it is. But I think the market is weighing how much they believe they depend on these injections and how much they could get along without the training wheels and just a strong economy.

SIEGEL: Thank you, John.

YDSTIE: You're welcome.

SIEGEL: That's NPR's John Ydstie talking about another rough day on Wall Street.

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