MARKET REPORT

Stocks ride Fed seesaw, then slide

NEW YORK - The Federal Reserve took financial markets for a ride Wednesday, pushing stock prices up in the morning then sending them down in afternoon.

Prices surged on congressional testimony by Fed Chairman Ben Bernanke early in the day that suggested the central bank would not end its economic stimulus program any time soon. But then minutes of a Fed meeting were released suggesting the stimulus could be scaled back as early as next month if the economy picks up, and stocks began dropping fast.

The Fed minutes showed that some policymakers favored tapering a bond-buying program. That prompted traders to dump U.S. government bonds, sending their interest rates, or yields, higher.

The yield on the benchmark 10-year Treasury note rose above 2 percent for the first time since March 14, to 2.03 percent from 1.93 percent the day before.

The Fed is buying $85 billion worth of bonds every month as part of its stimulus program. That has kept interest rates low and encouraged investors to put money into stocks and other riskier assets instead of bonds. If the Fed slows down its bond purchases, investors fear, it could lead to an outpouring of money from the stock market and back into bonds.

The Dow Jones industrial average ended the day down 80.41 points, or 0.5 percent, to 15,307.17. Earlier, the index had risen as much as 154 points after Bernanke started speaking to lawmakers.

“If you had any doubts about the influence of the Fed, you only have to look at the roller coaster that followed Bernanke’s testimony this morning and the release to Fed minutes this afternoon,” said David Kelly, chief global strategist at JPMorgan Funds.

The minutes of the April 30-May 1 meeting showed that “a number” of members expressed a willingness to scale back the Fed’s bond purchases, perhaps as soon as June, if the economy accelerates. The Fed next meets June 18-19.

The Standard & Poor’s 500 fell 13.81 points to 1,655.35, a decline of 0.8 percent.

Three stocks fell for every one that rose on the New York Stock Exchange. Consolidated volume was heavy at 4.3 billion shares.

Earlier in the day, Bernanke had told lawmakers it was too soon for the central bank to pull back on its stimulus programs. Investors were also encouraged by news that sales of previously occupied U.S. homes rose last month to the highest level in 3 ½ years.

“It’s up, up and away,” said Stephen Carl, head of stock trading at the Williams Capital Group, as stocks were soaring shortly after Bernanke stopped speaking.

In addition to buying bonds, the Fed has been keeping short-term interest rates near zero to encourage people and businesses to borrow and spend more.

The Russell 2000 index of small-company stocks fell 16.52 points to 982.26, a loss of 1.7 percent.

The Nasdaq composite was down 38.82 points at 3,463.30, or 1.1 percent.

In addition to stimulus from the Fed, other factors have been pushing the stock market higher, including a rebounding housing market, a pickup in hiring and strong earnings at big U.S. companies. On Wednesday, S&P Capital IQ reported earnings in S&P 500 companies had reached a quarterly record.

Investors don’t like it when the Fed pulls back from stimulus policies and raises interest rates because those actions typically have slowed the economy, and have even led to recessions. But JPMorgan’s Kelly notes that when interest rates are very low like now, history suggests interest-rate increases won’t hurt the stock market that much because it means the economy is getting stronger.

Business, Pages 28 on 05/23/2013

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