Fed chief’s remarks send stocks sliding
Stocks fell Wednesday after Federal Reserve Chairman Ben S. Bernanke chided investors who may have looked past long-standing concerns about inflation. The Dow Jones industrials fell nearly 100 points, the third straight session of declines.
A rise in oil prices to a six-month high and a weaker-than-expected gain in orders for large manufactured goods added to investors’ concerns.
In Capitol Hill testimony, Bernanke said that although core inflation slowed modestly in the second half of 2006, recent readings remained “uncomfortably high.” The Fed chief also said troubles among some mortgage lenders that cater to borrowers with poor credit didn’t appear to have spread to the broader economy, although he added that the situation required further observation.
Stocks rallied last week after investors interpreted language from the Fed as opening the possibility of a reduction in interest rates. But concerns about stubborn inflation could reverse investors’ hopes for a rate cut, even as the economy continues to cool.
“I think what the Fed is trying to tell us is that it is between a rock and a hard place. And when you’re between a rock and a hard place you just can’t move,” said Drew Matus, senior economist at Lehman Bros. Holdings Inc.
The Dow industrials fell 96.93 points, or 0.8%, to 12,300.36. The Dow fell by as much as 140 after the Fed released Bernanke’s prepared remarks for his testimony.
Broader stock indicators also pulled back. The Standard & Poor’s 500 index fell 11.38 points, or 0.8%, to 1,417.23, and the Nasdaq composite index fell 20.33 points, or 0.8%, to 2,417.10.
Bond yields moved higher, with the yield on the benchmark 10-year Treasury note rising to 4.62% from 4.60% on Tuesday.
“It wasn’t quite a perfect storm, but you had enough winds buffeting the market around so it made it hard,” Matus said of the combination of Bernanke’s testimony, the reading on orders for durable goods and political tensions between Iran and the West.
Matus contends that Wall Street in the last week might have overestimated the central bank’s ability to lower interest rates.
“In reality, there’s a lot of uncertainty. You don’t move forward unless you can see the path, and I don’t think they can see the path,” he said of the Fed.
The central bank has left short-term interest rates unchanged at its last six meetings, interrupting a string of 17 straight increases that began in 2004.
“You can’t cut rates to try and spark growth and hope to contain inflation at the same time,” Matus said.
The dollar was mixed against other major currencies, while gold futures rose $4.40 an ounce to $666.50.
Beyond concerns about inflation, economic data also weighed on stocks. Orders for durable goods increased 2.5% in February amid an increase in sales of commercial aircraft and autos after a 9.3% falloff in January. Wall Street had expected the Commerce Department report to show a 3.5% gain. The weak reading for January contributed to a Feb. 27 global sell-off that cut the Dow index by 416 points. Excluding the volatile transportation sector, orders fell 0.1%, the fourth drop in five months.
Adding to economic concerns, oil prices continued to climb amid political tensions in the Middle East over Iran’s detention of British sailors and marines. Oil prices rose on rumors, which the U.S. military denied, that Iran had fired a missile at a U.S. ship in the Persian Gulf. Also, weekly government inventory data showed a decline in stores of crude oil and gasoline.
Crude oil futures rose $1.15 to settle at $64.08 a barrel Wednesday, its highest level since Sept. 11, 2006.
In other market highlights:
* Beazer Homes fell $2.64, or 8.4%, to $28.77 after coming under investigation by a host of government agencies for its mortgage lending practices as well as other financial dealings. Beazer said it was complying with a federal prosecutor’s request for documents.
Other home builders fell alongside Beazer. Hovnanian Enterprises dropped $1.09 to $25.55, while KB Home fell $1.43 to $43.88.
* Archer Daniels Midland rose 91 cents to $36.84 after a Citigroup analyst said the food producer, which makes a type of ethanol derived from corn, should benefit if corn prices fall amid an expected bump in supply.
* Vyyo, which makes communications equipment, jumped 97 cents to $8.44 after receiving $35 million in funding from Goldman Sachs.
