Fretting Over Fed Slams Stocks

Updated from 4:05 p.m. EST

The Fed made a subtle change in language and the market changed direction in a dramatic way.

Stocks closed sharply lower after the Federal Reserve altered its monetary policy statement by dropping the now-famous promise to keep interest rates low for a "considerable period," as traders anticipated a gradual shift toward a tightening mode..

The Dow lost 141.55 points, or 1.3%, to 10,468.37 and the S&P 500 dropped 15.57 points, or 1.4%, to 1128.48, their biggest single-day point losses since September 24 . The Nasdaq plunged 38.67 points, or 1.8%, to 2077.37, its worst decline since December 9.

Volume on the New York Stock Exchange was 1.84 billion shares, while 2.29 billion shares changed hands on the Nasdaq. Decliners walloped advancers by about 7 to 3 on the NYSE and by about 7 to 2 on the Nasdaq.

Fed Sends Shockwaves

The Fed left its key policy rate unchanged at 1%, but did remove the language, "The committee believes that policy accommodation can be maintained for a considerable period." This statement has been debated heavily in the financial community, with many believing its removal would signify a shift toward a less accommodative policy. The FOMC replaced the statement with, "The committee believes that it can be patient in removing its policy accommodation."

"From our standpoint, the change in language represents a small step toward an eventual rate hike," said David Greenlaw, U.S. economist at Morgan Stanley. "We continue to look for a tightening move in September, assuming that labor market conditions soon begin to show noticeable improvement."

The stock, bond and currency markets all reacted sharply to the Fed's statement.

Stocks dropped like bricks after the decision. At about 2 p.m. EST, the Dow was up about 29 points, the S&P 500 was up 4 points and the Nasdaq was up 3 points. Shortly after the decision at 2:15 p.m. EST, the Dow was down over 100 points, the S&P 500 was off over 10 points and the Nasdaq had fallen over 20 points. The major averages moved even lower as the day progressed.

"There was a little confusion over the removal of the language 'considerable period,' but the knee-jerk reaction was that higher rates are imminent," said Peter Blatchford, a trader at Miller Tabak. He believes it is a bit of an overreaction.

Bonds also felt the pressure; the 10-year U.S. Treasury note had posted modest gains earlier in the day, but was stung with more than a 1-point decline following the announcement, bringing the yield over 4.25%. On the day, the 10-year Treasury note fell 23/32, yielding 4.17%.

The dollar was slightly stronger after the news, as currency traders bet higher yields on U.S. assets would attract more foreign investment. On the day, the dollar was weaker vs. both the euro and the Japanese yen. One euro was recently worth about $1.249, while the dollar was worth 106.03 yen.