Fed to wind down its bond buying
Federal Reserve Chairman Ben Bernanke speaks during the conference 'New Building Blocks for Jobs and Economic Growth' at Georgetown University.
JEREMY HOBSON: Well tomorrow is the first day of June which means it's the month the Federal Reserve stops its $600 billion bond buying program. The one called Quantitative Easing. The Fed's goal was to flood the market with cash so that interest rates would drop, and companies would be enticed to borrow more money and hire more people.
Well now that the program is ending. A lot of economists and investors are worried about how markets will react.
Our New York bureau chief Heidi Moore reports.
HEIDI MOORE: Michael Mata has been an investor in the bond markets for over 20 years. At ING Investment Management, he runs a big bond fund -- like the one you find in your 401(k).
These days, Mata is thinking a lot about how he'll react when the Federal Reserve stops buying Treasury bonds.
MICHAEL MATA: Philosophically, one of the sayings in the business is, if you're going to panic, panic early.
Even savvy investors can't predict what the end of the Fed's program will mean. Think of the bond market like a pool in your backyard and the water level as the price of bonds. The Fed -- this giant, 800-pound gorilla -- is sitting in there and making the pool look full. It looks safe now. But investors like Mata are afraid they're going to dive in when the gorilla leaves and hit their heads really hard.
MATA: It makes it much more difficult to gauge what's real, just as in '07 when your house was up 40 percent, you knew in the back of your mind that part of that probably wasn't real.
Mata says it's hard to tell which bonds will be attractive after the Fed leaves.
MATA: It makes the job and the investing process a little trickier.
It's just as tricky in the stock market. Low interest rates sent many investors looking for higher returns in stocks.
Peter Boockvar plans investment strategies for Miller Tabak. He says the Fed pumped the market full of steroids. The Dow Jones Industrial Average has jumped about 24 percent in ten months. But Boockvar predicts the index will fall as much as 15 percent when the Fed stops buying.
PETER BOOCKVAR: The markets won't like it because they've become so accustomed to it.
But, like Mata, Boockvar is happy to say good riddance to the Fed's program.
BOOCKVAR: At some point it has to end, at some point the U.S. economy has to be left alone. At some point the training wheels have to come off, and the economy has to grow on its own.
Investors are still nervous. For all their faith in American capitalism, it's been a long time since they've seen the markets work without the government's help.
In New York, I'm Heidi Moore for Marketplace.