Stocks wither amid uncertainty from Fed

Associated Press

NEW YORK — A big rally in U.S. stocks evaporated Wednesday as the Federal Reserve appeared to struggle with questions related to inflation and government policy and suggested it might start trimming its balance sheet later in the year.

Stocks had jumped early on after payroll processor ADP said private U.S. businesses added 263,000 jobs in March, which was more than expected. The Dow Jones industrial average rose as much as 198 points, and the Nasdaq composite reached an all-time intraday high. Industrial and energy companies made some of the largest gains.

But stocks started falling at 2 p.m. Eastern, when the Federal Reserve disclosed the minutes from its policy meeting last month. The minutes showed Fed officials discussing plans to reduce the Fed’s bond holdings later this year and disagreeing over whether it would be safe to let inflation rise faster and how to deal with the economic impact of President Donald Trump’s stimulus ideas.

The Standard & Poor’s 500 index lost 7.21 points, or 0.3 percent, to 2,352.95. The Dow sank 41.09 points, or 0.2 percent, to 20,648.15. The Nasdaq fell 34.13 points, or 0.6 percent, to 5,864.48. The Russell 2000 index of small-company stocks lost 16.03 points, or 1.2 percent, to 1,352.14.

The Federal Reserve bought trillions of dollars’ worth of bonds during the financial crisis of 2008-09 in an effort to stimulate the economy. When its bonds mature, it has bought new ones. But the Fed may stop buying new bonds when older ones mature, which would shrink the size of its holdings.

That sent bond prices surging and yields tumbling. The yield on the 10year Treasury note fell to 2.33 percent from 2.36 percent. When bond yields fall, interest rates fall with them. That tends to hurt banks because it means reduced profits on lending, and banks took the largest losses Wednesday. JPMorgan Chase dropped $1.12, or 1.3 percent, to $86.19 and BB&T shed 56 cents, or 1.3 percent, to $43.98.

Banks made strong gains in early trading but wound up with much bigger losses than the rest of the market.

Recently, it seemed investors and the Fed understood each other well, as the central bank indicated it intended to keep raising interest rates gradually assuming the economy continued to grow at a steady clip. It raised rates in December and March. The uncertainty reflected in the Fed’s March meeting may challenge that understanding.