For nearly five years, the Fed has been pursuing an aggressive monetary policy to shore up the U.S. economy, which was battered by the financial crisis. Now that the U.S. economy has shown signs of improvement, Bernanke said the Fed is considering when it should start normalizing its policy.
In the latest round of its monetary stimulus program — known as quantitative easing, or QE — the Fed has been buying $85 billion worth of financial assets each month to keep long-term interest rates low in the hope of boosting borrowing and spending. After the Fed's decision to keep the policy unchanged, Bernanke confirmed that the central bank's purchases will likely slow down this year and end next year. When the reduction — so-called tapering — begins will hinge on the U.S. economic data, though.
That prompted some concern among investors who have grown used to the Fed's active involvement in the financial markets — the Dow tumbled over 200 points Wednesday while oil and gold prices slid— even though the remarks signal a healthier U.S. economic outlook. Much of the reason why a number of assets, including stocks around the world, have advanced over the past few years is that the money created by central banks through QE has found itself in financial markets.
"Doubtless the analysis will continue for some time yet and just where markets settle will take some time to establish but this was always an inevitable move," said Fawad Razaqzada, market strategist at GFT Markets.
"Critically however the exact timing of the tapering is still up in the air so once the dust settles, the battle between greed and fear is likely to ensure there's no immediate shortage of volatility."
In Europe, the FTSE 100 index of leading British shares was down 2.2 per cent at 6,209 while Germany's DAX fell 2.3 per cent to 8,007. The CAC-40 in France was 2.2 per cent lower at 3,756.
Wall Street was poised for further losses at the bell, with Dow futures down 0.5 per cent and the broader S&P 500 futures 0.6 per cent lower.
Earlier, stocks in Asia tanked too, with stocks further negatively impacted by a private survey showing a slowdown in manufacturing in China in June. HSBC's preliminary purchasing managers' index fell to a nine-month low of 48.3 in June, down from 49.6 in May. Numbers below 50 indicate a contraction.
Among Asia's markets, Tokyo's Nikkei 225 down 1.7 per cent lower at 13,014.58 while Hong Kong's Hang Seng index tumbled 2.9 per cent to 20,382.87.
It's not just stocks that have responded to the developments with the Fed. The dollar has pushed higher as the prospect of new Fed money has diminished in light of Bernanke's statement. The euro was down a further 0.5 per cent at $1.3217 Thursday while the dollar rose 1.3 per cent to 97.90 yen.
The dollar's surge is having a particular impact on commodities, which are priced in the currency.
The benchmark New York oil price was down $2 at $96.48 a barrel, while the gold price slid 4.6 per cent t, or a little over $61 to near three-year lows of $1,312 an ounce.
Michael Hewson, senior market analyst at CMC Markets, said gold, for so long a preferred investment for the risk-averse, is now nearing "precarious territory."
"Currently at three-year lows there is a risk we could see an even bigger sell-off if the $1,300 level is breached significantly," he said. "While the time line for the Fed exit strategy is very much data dependent and based on a whole host of economic indicators between now and next summer, gold prices have slid sharply as the dollar goes sharply bid across the board."Suggest a correction