New York: Wall Street skidded lower on 5 June 2007 after comments from Federal Reserve chairman Ben Bernanke and a strong reading on the US 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 spurred investors to sell a day after the Dow and Standard and Poor’s 500 index edged up to new highs. Bernanke remarked that the US economy will recover from its recent feeble performance, despite a housing slump that he said could drag on the economy for longer than anticipated.
Bernanke’s forecast of rebounding growth, as well as his assessment that inflation is “ebbing” but remains “somewhat elevated,” made it appear unlikely the Federal Reserve will lower rates anytime 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 and Company.
While the Fed chairman’s comments stalled a months-long rally, many analysts have been predicting Wall Street would soon pull back before heading higher later this year. Before today’s decline, the Dow and the S and P 500 had risen more than 8% since the beginning of the year.
A robust report on the service sector from the Institute for Supply Management failed to boost stocks. 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% of US 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% , to 13,595.46, after earlier falling more than 100 points.
Broader indexes also retreated. The Standard and Poor’s 500 index fell 8.23, or 0.53% to 1,530.95, while the Nasdaq composite index shed 7.06, or 0.27% , to 2,611.23.
Bonds slipped after Bernanke’s comments and the strong service sector data.
“The good news is he did say this residential real-estate morass won’t leach out into the main economy. The bad news is he’s still beating the drum pretty hawkishly on inflation,” said Jack Ablin, chief investment officer at Harris Private Bank.