The Dow Jones Industrial Average closed down more than 353 points on Thursday in a sell-off sparked by uncertainty about the end of a government monetary stimulus program and a credit crunch in China.
Wall Street followed on a downturn in global markets. The Standard & Poor’s 500-stock index lost 2.5 percent, while the Dow and Nasdaq composite index both lost 2.3 percent.
On Wednesday, Federal Reserve Chairman Ben Bernanke reassured investors that interest rates would remain low for the foreseeable future, but hinted that if the U.S. economy continued to improve, it was only a matter of time before the central bank halted its monthly purchase of approximately $85 billion worth of bonds.
“What the Fed’s action did … was to confirm that unless things in the U.S. get worse then the music is going to be turned down at the party and the dancing is about to end,” Paul Lambert, head of currency at Insight Investment in London, told The Wall Street Journal. “This adjustment is likely to be a volatile one.”
As worrisome for some investors are a surge in interbank lending rates in China in the past two weeks that have caused a stall in bank-to-bank borrowing.
According to The New York Times:
“A huge shadow banking operation has emerged in China in recent years, with smaller banks and trust companies borrowing from bigger state-run banks and then turning around and re-lending that money at high interest rates to private companies and property developers, usually those that have trouble borrowing.
It is a risky strategy for the Chinese government, which is also grappling with a slowing economy. Many of those companies may have a harder time paying back their loans and many analysts fear the losses could ripple through the banking system.”