Markets mostly fall as investors digest Fed decision

The U.S. central bank had been widely expected to announce a scaling back Wednesday of its $85 billion of monthly bond purchases, which have put downward pressure on long-term borrowing rates. Instead, the Fed did nothing as Fed chairman Ben Bernanke voiced worries over the state of the U.S. economic recovery and the still-high levels of unemployment.

The news sent U.S. markets up sharply, resulting in the Dow Jones industrial index and S&P 500 closing at record highs on Wednesday.

But those gains turned into losses as the news set in on Wall Street. Even a slate of slightly positive economic releases out of the U.S., from housing sales to unemployment figures, were not enough to boost the indexes.

The Dow Jones industrials index pulled back 40.39 points to 15,636.55, while the S&P dipped 3.18 points to 1,722.34. The Nasdaq was up 5.74 points at 3,789.38.

“The Fed’s announcement, or lack thereof, caught a lot of investors by surprise, probably sparked a little bit more euphoria than was justified,” said Philip Petursson, managing director of the portfolio advisory group at Manulife Asset Management.

“Cooler heads are looking at the situation today and saying, ‘if the Fed is saying that there’s reason to maintain quantitative easing at the current pace, perhaps the economy isn’t as strong as the market is giving it credit for.”‘

Bernanke said the bank has no fixed date to slow or end its bond purchases, adding that it could still move to taper later this year. But he noted that the program won’t necessarily end when U.S. unemployment reaches seven per cent. It is now at 7.3 per cent.

The Fed meets again in October, which some say may be too soon for such an announcement. It’s next scheduled meeting after that is in December.

“It just delays the inevitable,” said Petursson. “They will have to announce tapering at one point… Their intention is that they want the program to come to an ultimate end by the middle of 2014, which would imply that they would want to start tapering sooner rather than later.”

On the TSX, the gold sector saw the worst declines, as it fell 3.15 per cent. Shares in Barrick Gold Corp. (TSX:ABX) dropped 3.48 per cent, or 72 cents, to $19.94, while Goldcorp. Inc. (TSX:G) dipped 4.01 per cent, or $1.17, to $28.02. December bullion climbed $61.70 to US$1,369.30 an ounce.

The metals and mining sector was down 0.48 per cent even as December copper saw an uptick of seven cents to US$3.35 a pound. The energy sector fell 0.27 per cent, while the October crude contract fell $1.68 to US$106.39 a barrel.

The U.S. Conference Board said its index of leading indicators increased 0.7 per cent in August compared with a 0.5 per cent gain in July. Conference Board economist Ken Goldstein said the two months of gains pointed to “more pep” in the pace of economic activity.

Meanwhile, the latest weekly U.S. unemployment figures also showed that the number of people applying for benefits last week rose by 15,000 to a seasonally adjusted 309,000. The level is only slightly above the previous week’s 294,000, the lowest in six years.

U.S. home sales rose last month to the highest level since February 2007 as buyers rushed to close deals before interest rates rise further. The National Association of Realtors says sales of previously occupied homes rose 1.7 per cent to a seasonally adjusted annual rate of 5.48 million in August. That is consistent with a healthy market.

In corporate news, the largest U.S. bank, JPMorgan Chase & Co., is paying $920 million in penalties in a case in which regulators said the bank failed to properly supervise traders in its London operation, allowing them to assign inflated values to trades and to cover up losses as they ballooned. Two of the traders are facing criminal charges for allegedly falsifying records to hide the losses.