New York – Wall Street skidded lower Tuesday after comments from Federal Reserve Chairman Ben Bernanke and a strong reading on the service sector suggested the central bank has little reason to lower interest rates.
Bernanke’s speech by satellite to an international monetary conference in South Africa on Tuesday spurred investors to sell a day after the Dow Jones industrials and Standard & Poor’s 500 index edged up to new highs. Bernanke remarked that the economy will recover from its recent feeble performance, despite a housing slump that he said could drag on the economy for longer than anticipated.
His forecast for rebounding growth, as well as his assessment that inflation is “ebbing” but remains “somewhat elevated,” made it appear unlikely the Fed will lower rates any time soon, a disappointment for Wall Street.
Behind the stock market’s surge, driven primarily by strong takeover activity, has been a backdrop of stable interest rates and the possibility of a rate cut; recently, though, with bond yields creeping up, some investors fear the Fed may alter that climate.
“The market is hoping for slow growth and moderate inflation, and now there’s concern they might have to bump up rates in the second half of the year,” said Jim Herrick, director of equity trading at Baird & Co.
The Institute for Supply Management issued its service-sector report Tuesday. The ISM’s nonmanufacturing index came in at 59.7 in May, higher than expected and up from April’s reading of 56.0.
A reading above 50 indicates expansion in the service sector, a diverse group of industries that represents about 80 percent of U.S. economic activity. Investors want to see growth but worry that if it’s too robust, it could prompt a rate hike.
The Dow fell 80.86, or 0.59 percent, to 13,595.46, after earlier falling more than 100 points.
Broader indexes also retreated. The Standard & Poor’s 500 index fell 8.23, or 0.53 percent, to 1,530.95, while the Nasdaq composite index shed 7.06, or 0.27 percent, to 2,611.23.
In takeover news, telecommunications company Avaya Inc. said late Monday it agreed to an $8.2 billion offer by private-equity firms Silver Lake and TPG Capital. Avaya rose 31 cents to $17.03.
Retail stocks took a hit after home-goods seller Bed Bath & Beyond Inc. late Monday warned its fiscal first-quarter earnings may fall below analyst estimates. The stock lost $2.20, or 5.4 percent, to $38.27.
