US markets closed lower as Fed optimism fades

The US markets closed mostly lower on Wednesday, as optimism about Federal Reserve plans to buy more bonds faded along with Bernanke warning that Fed does not have the ability to shield the economy from the fiscal cliff and investor focus returning to the budget deadlock in Washington. Bernanke’s comments came after the US central bank stated that it would add $45 billion in treasury-note purchases to its $40 billion-a-month purchases of mortgage-backed bonds, and would keep official rates near zero so long as the jobless rate remains above 6.5% and inflation is not forecast to rise above 2.5%. The Federal Reserve surprised almost everyone when it announced a major change in how it will conduct monetary policy. For the first time, the Fed has announced a goal for the unemployment rate. By expressing its anticipation that it will keep interest rates extremely low until the unemployment rate falls to 6.5% and as long as inflation doesn’t get out of control, the Fed has become more aggressive about turning the economy around. Besides, majority of Federal Reserve officials don’t expect to raise the main interest rate until 2015, when they forecast the jobless rate will fall to between 6 percent and 6.6 percent. Federal Open Market Committee participants also forecasted that gross domestic product will expand 2.3% to 3% next year, compared with 2.5% to 3% in September.

Meanwhile, a day after conferring by phone with President Barack Obama, House Speaker John Boehner stated that the president’s revenue demand would not pass Congress. The lawmakers appear to be divided in budget negotiations. House Speaker John Boehner added that President Obama’s demand for tax increase of $1.4 trillion cannot win approval in the House or in the Senate. The President lowered his demand for increased tax revenues from wealthy taxpayers from $1.6 trillion to $1.4 trillion. Later, White House spokesman Jay Carney stated that the president continues to believe a deal to avert the fiscal cliff is possible by the end of the year. But Carney added that Republican leaders have given no indication that they would agree to higher taxes for the wealthiest 2%.

In Europe, the European Union finance ministers moved closer to an agreement on a single euro-area bank supervisor that could give the European Central Bank more time to take on its expanded oversight role. The proposal also allows the ECB unlimited discretion to delay if it wants more time to prepare for its oversight mission.  Separately, industrial production in the euro zone declined in October. The production dropped 1.4% from a month ago in October after a 2.3% fall in September.

The Dow Jones Industrial Average lost 2.99 points or 0.02 percent, to close at 13,245.50, the S&P 500 added 0.64 points or 0.04 percent, to finish at 1,428.48, while the Nasdaq fell by 8.49 points or 0.28 percent, to end at 3,013.81.

Indian ADRs closed mostly in red on Wednesday, HDFC Bank was down by 0.46%, Infosys was down 0.20% and Dr. Reddy’s Lab was down 0.15%. On the other hand, Tata Motors was up by 0.88% and Wipro was up 0.04%.