NEW YORK - Financial markets shuddered Wednesday after the Federal Reserve said it could start scaling back its huge bond-buying program later this year and end it by the middle of 2014.
The Fed's $85 billion in monthly bond purchases have been a boon for the U.S. economy, keeping interest rates near historic lows and lifting the stock market more than 140 percent over the past four years. Now, it looks like the Fed is closer to ending that program as the U.S. economy improves.
The Dow Jones industrial average dropped 206 points, or 1.4 percent, to 15,112. The market started falling modestly after the Fed released its policy decision at 2 p.m., and the slide accelerated through the afternoon after Fed Chairman Ben Bernanke said the Fed could slow its purchases this year if the economy improves.
Bond and currency markets reacted even more sharply to the Fed's news.
The yield on the 10-year Treasury note jumped to 2.31 percent, its highest since March 2012. The yield started the day at 2.21 percent. The dollar surged against the Japanese yen, the euro and other currencies as traders anticipated higher U.S. interest rates.
The Standard & Poor's 500 index fell 22 points, or 1.4 percent, to 1,628. High-dividend stocks like telecommunications and utilities fell the most.
The Nasdaq composite fell 38.89 points, or 1.1 percent, to 3,443.20.
The Fed has been buying bonds and keeping interest rates near zero to support an economy that is still struggling to grow faster following the Great Recession. For weeks investors have been trying to figure out when the central bank will start to ease back on those purchases.
"The Fed right now is really trying to walk a tightrope," George Rusnak, head of fixed income at Wells Fargo Private Bank, said shortly after the Fed's statement was released. "They're preparing the market for tapering but at the same time they are trying to comfort the markets that it won't be too dramatic or too quick."
The Fed's policy of low interest rates coupled with bond-buying has been a major factor in driving stocks higher from their lows during the Great Recession. The S&P 500 has gained 14.2 percent this year.
In commodities trading, the price of crude oil fell 20 cents, or 0.2 percent, to $98.24 a barrel. The price of gold rose $7.10, or 0.5 percent, to $1,374 an ounce.