Stocks Decline on Bernanke Report
Stocks slumped and bond yields rose in the final hour of trading Monday, after CNBC reported that Federal Reserve Chairman Ben S. Bernanke was dismayed that markets viewed him as being “dovish” on interest rates and inflation.
The Dow Jones industrial average, which had reached a fresh six-year high of 11,428 during trading, fell about 75 points in the final hour, ending with a loss of 23.85 points, or 0.2%, at 11,343.29.
The benchmark 10-year Treasury note yield jumped to 5.14%, a four-year high, from 5.06% on Friday.
In other trading, gold reached a new 25-year high and oil continued to rebound. The dollar rallied somewhat after sinking last week.
Stocks had been modestly higher for much of the day, then slid near the close after CNBC’s Maria Bartiromo said she had asked the Fed chief at the annual White House correspondents’ dinner Saturday whether “the markets and the media [got] it right last week in terms of its reaction to your congressional testimony.”
Bernanke, speaking to Congress on Thursday, had signaled that the central bank might be ready to pause after raising short-term interest rates at every Fed meeting since mid-2004. At least, that was the way many Wall Street analysts viewed his testimony.
But Bartiromo said that when she asked Bernanke if the markets had correctly construed his comments, “He said, ‘no.’ He said. ‘it’s worrisome that people would look at me as dovish and not necessarily an aggressive inflation-fighter,’ ” Bartiromo reported.
She added that Bernanke “said that he and his [Fed cohorts] wanted to basically create some flexibility for the Federal Reserve, saying they may pause but the [economic] data will dictate whether more rate hikes occur at future meetings.”
The Fed’s key rate now is 4.75%. Policymakers meet again May 10.
Some analysts said Wall Street understood that the Fed wouldn’t necessarily be finished tightening credit if it paused for one or more meetings.
“The Fed is at the point where they have to start being a little more forward-looking and signal to the market when they’re in the fine-tuning mode,” said Michael Gregory, an economist at BMO Nesbitt Burns.
“I don’t think [Bernanke] has been misinterpreted, it’s just that legitimate risks on both the inflation and growth sides have opened up.”
If the Fed stops tightening too soon, it could allow inflation to resurge. If it tightens too much, it could push the economy into recession.
There were no signs of recession in strong reports Monday on U.S. manufacturing activity in April, and construction and consumer spending in March.
But analysts were concerned about a report showing higher inflation in March in a price gauge tied to the consumer spending report.
“Growth with inflation will definitely get the Fed nervous,” said Gerald Lucas, head of Treasury strategy at Banc of America Securities in New York.
Still, Atlanta Fed President Jack Guynn on Monday offered more hope of a Fed pause.
“If -- and I emphasize if -- my most likely forecast of sustainable output growth and modest inflation is right, then I am of the view that we are very close to having Fed policy properly calibrated for now,” he told business executives in Nashville.
CNBC’s report on Bernanke helped to stabilize the dollar, which had tumbled last week in part on expectations that U.S. interest rates might plateau soon, potentially reducing the appeal of dollar-denominated bonds.
The euro fell to $1.259 from an 11-month high of $1.261 on Friday. But the dollar slipped to a new 28-year low against the Canadian dollar. One U.S. dollar was worth 1.114 Canadian, down from 1.117 on Friday.
In New York commodities trading, near-term oil futures jumped $1.82 to $73.70 a barrel on continued fears of foreign supply disruptions.
Gold futures rose $5.70 to $657.50 an ounce, a new 25-year high. Gold has rocketed this year in part on worries about inflation.
Among the day’s market highlights:
* Broad stock market indexes were mostly lower. The Standard & Poor’s 500 lost 5.42 points, or 0.4%, to 1,305.19. The Nasdaq composite declined 17.78 points, or 0.8%, to 2,304.79.
Losers outnumbered winners by 5 to 4 on the New York Stock Exchange.
* Wal-Mart jumped 90 cents to $45.93 after the retailer said its sales at stores open at least a year grew 6.8% in April, better than the 4% to 6% it had predicted. The stock had been up as much as $1.55.
* Brokerage stocks led financial shares lower. Goldman Sachs slid $3.84 to $156.45; Bear Stearns sank $4.39 to $138.12.
* Energy stocks rose with oil prices. Baker Hughes gained $2.75 to $83.58 and Valero Energy added $1.21 to $65.95.
Coal stocks also rallied. Arch Coal jumped $5.18 to $100.17.
* Microsoft edged up 14 cents to $24.29 after plunging $3.10 on Friday. Some investors were disappointed by the company’s first-quarter earnings report issued late Thursday.
