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Changing Fed Stance Means More Stock Volatility

NEW YORK ( TheStreet) -- The month of June has brought sharp selloffs to stock markets, with the downside momentum propelled largely by changing expectations for the Federal Reserve's monthly bond-buying programs. As a result, the S&P 500 has fallen more than 3% from its all-time highs, posted on May 21. Some sections of the market now expect the Fed to begin phasing-out its third round of quantitative easing as early as September.

As economic surveys continue to indicate stabilization and recovery, these predictions become more and more likely. Because of this, central bank comments have increased in importance in recent weeks as analysts look for clues to assess the timing of the Fed's next move.

At its most recent monetary policy meeting, the Federal Open Market Committee (FOMC) did reiterate its intention to continue purchasing $85 billion in bonds each month and to maintain near-zero interest rates as long as the jobless rate holds above 6.5%. But these latest bear moves in the benchmark stock indices show investors have their doubts, and that the Fed is ready to alter its policy stance.

Beige Book Shows Stable Growth

The latest sign of economic stability came with this week's Beige Book release, which showed "modest to moderate" growth in 11 of the 12 Federal Reserve districts. Areas of strength could be seen in construction, manufacturing and business services.

Growth in hiring rates was another bright spot in several districts, along with improvements in consumer spending (on gains in automobile purchases). Market reaction to the story was bearish, however, as this lends credence to the argument that the Fed can start to scale back its stimulus programs.


Internally, the Fed debate continues. Kansas City Fed President Esther George has dissented at the last three monetary policy meetings, saying the central bank should slow the pace of its bond purchases. John Williams, head of the San Francisco Fed, has suggested that we could see downward adjustments in bond purchases before September. Atlanta Fed President Dennis Lockhart has shown less confidence, saying that economic data has yet to show enough consistency to warrant a change in stimulus policy.

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