More on Yesterday's Federal Reserve Fallout

At WSJ, "Turmoil Exposes Global Risks":

Worries about China and the Federal Reserve's plans rattled global markets for a second day, sending U.S. stocks to their biggest loss this year and hammering bonds and many commodities.

The Dow Jones Industrial Average dropped 353.87 points, or 2.34%, to 14758.32, on big volume, marking its first back-to-back decline of 200 points or more since Nov. 1, 2011. Yields on Treasurys hit their highest since August 2011 as bond prices fell.

he turmoil exposed vulnerabilities in the financial markets and the world economy that had been mostly ignored because central banks were willing to ride to the rescue with huge amounts of money.

Investors said Thursday they were buffeted by two distinct forces: worries about the health of China's economy and financial sector, and the prospect that the beginning of the end of the Fed's extraordinary stimulus could reverse the huge rally in assets ranging from "junk" bonds to dividend-paying stocks. Gains in many of those assets had been fueled by ultralow interest rates and expectations that the Fed would continue to pump money into financial markets.

The rout underscored persistent worry about the health of the global economy at a time when the U.S. and Europe are struggling with high unemployment. Adding to the wrenching action is a cash squeeze in China, which is trying to tighten the spigot on credit without causing problems, and a report that financing for cash-strapped Greece could be in danger.

The declines came a day after Fed Chairman Ben Bernanke said that the central bank expects to begin to pare its huge bond-buying program later this year and that it could end sometime next year, provided the economy unfolds as the Fed expects. The prospect of the Fed weaning the economy off unusually easy credit at a time when the pace of U.S. economic growth is modest and inflation is below the Fed's target jolted markets around the world.

At the same time, many investors believe the shakeout heralds a shift toward higher interest rates and sustained, healthier U.S. growth, following a long period of superlow rates that helped feed investor funds into higher-yielding investments. Those investments have declined sharply in recent weeks as the market has begun preparing for more-normal rates.

The action showed investors continue to grapple with the impact of an eventual reduction of the Fed's $85 billion in monthly bond purchases. U.S. bonds and stocks have broadly risen this year, with few sizable declines until the past month.

The main thing is that the investors and speculators expect interest rates to go up, and that could destabilize markets in all kinds of housing and mortgage-related sectors.

More at the link.

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