U.S. stocks decline before tomorrow’s Fed decision on stimulus

U.S. stocks fell, following yesterday’s rally for the Standard & Poor’s 500 Index (CME:SPH14), before Federal Reserve policy makers announce plans for their monthly bond-buying program tomorrow.

The S&P 500 declined 0.3% to 1,780.95 at 4 p.m. in New York.

“There are so many people watching the Fed’s decision, so much money on the edge, that the market is sort of just jumpy right now,” Sam Wardwell, an investment strategist at Pioneer Investments in Boston, said in a phone interview. His firm manages about $225 billion. “Everybody knows the Fed is going to taper sooner or later. The question is, are people putting on too many short positions, or not enough short positions? This is everybody betting on the outcome so the market is going to be volatile.”

The S&P 500 has fallen 1.3% this month, leaving it on track for the first December decline since 2007. Traders have boosted hedging against stock losses, driving the Chicago Board Options Exchange Volatility Index up 16% since the end of November.

The equities benchmark climbed 0.6% yesterday, halting a four-day decline, amid concern that improving economic data would prompt the Fed to slow its stimulus as soon as tomorrow.

About 34% of economists surveyed by Bloomberg on Dec. 6 predicted that the Fed will start to reduce its $85 billion of monthly bond purchases when it concludes the policy meeting. That compared with 17% in a survey from November.

Target Rate

Chairman Ben S. Bernanke has quadrupled Fed assets since 2008 with three rounds of bond purchases intended to reduce unemployment by lowering long-term borrowing costs. Vice Chairman Janet Yellen, who may win Senate confirmation this week to replace Bernanke, has been a supporter of the policy.

The central bank has said it will hold its target interest interest rate near zero “at least as long as” unemployment exceeds 6.5%, so long as the outlook for inflation is no higher than 2.5%. Unemployment fell to a five-year low of 7% last month.

“The Fed meeting, everyone has an eye on that,” Bill Schultz, chief investment officer who oversees about $1.1 billion at McQueen Ball & Associates in Bethlehem, Pennsylvania, said by phone. “While they don’t think the tapering talk is going to subside yet, there are still some apprehensions about what could come out of that.”

Data today showed the cost of living in the U.S. was unchanged in November from a month earlier, showing inflation is making scant progress toward the Federal Reserve’s goal.

Budget Deal

In Washington, the U.S. Senate advanced the budget agreement to a final vote by tomorrow with Republicans divided on their support for the measure. The Senate voted 67-33 to end debate on the $1.01 trillion U.S. spending plan. The measure passed the House 332-94 on Dec. 12 with almost equal numbers of Republicans and Democrats in support.

The S&P 500 has surged 25% this year, on course for the biggest annual gain since 2003, as the Fed maintained its stimulus and economic data exceeded expectations. The gauge has rallied more than 160% from a 12-year low in 2009.

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