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WASHINGTON (AP) â¿¿ Stock and bond prices are sinking because investors were caught off guard and alarmed by the Federal Reserve's signal that long-term interest rates are headed higher.
That's the view that emerges from an Associated Press survey of economists late last week. A majority of the more than two dozen economists polled support the Fed's plan to start slowing its bond purchases later this year if the U.S. economy continues to strengthen. Higher long-term rates will likely result.
But in the short run, traders fear that higher rates could slow growth and that the Fed might be moving too fast to slow its stimulus, according to many of the economists. Some also think investors perceived a shift in the Fed's timetable for curtailing its low-rate policies.
The Fed has been buying $85 billion a month in bonds to try to push down long-term borrowing rates to spur spending. On Wednesday, Chairman Ben Bernanke said the Fed will likely slow its bond-buying program later this year and end it next year because the economy is improving. That signal came earlier than some expected.
The Fed has also said it plans to keep its benchmark short-term rate near zero at least until the unemployment rate reaches 6.5 percent. It's now 7.6 percent. On Wednesday, it forecast that unemployment could reach 6.5 percent as early as the end of next year â¿¿ sooner than previously forecast â¿¿ and that the economy will grow faster than they thought three months ago.
Bernanke has cautioned that 6.5 percent unemployment is a threshold, not a trigger, for any short-term rate increase. Still, some investors now fear the short-term rate could rise by late next year or in early 2015, sooner than many had assumed.
"It was a big change in tone and messaging," said Mark Zandi, an economist at Moody's Analytics. "Judging by investors' reaction, it was too big a change. The lesson for (the Fed) is to move more incrementally with regard to their communications."