Stocks fall as Fed weighs cutting stimulus

By Bernard Condon

Associated Press

Published: Wednesday, May 22 2013 7:17 p.m. MDT

In this Aug. 11, 2010 photo, specialist John Urbanowicz, left, talks with a colleague on the floor of the New York Stock Exchange. Stocks are opening Wednesday, May 22, 2013, slightly higher as investors watch for the latest moves from the Federal Reserve. (AP Photo/Richard Drew)

Associated Press

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

Prices surged on congressional testimony by Fed Chairman Ben Bernanke early in the day that suggested the central bank would not slow its massive economic stimulus program any time soon. 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, which were released at 2 p.m. Eastern Daylight Time, showed that some policymakers favored slowing the central bank's 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 risky assets. If the Fed slows down its bond purchases, investors fear it could lead to an outpouring of money from stocks.

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 at 10 a.m. The Standard and Poor's 500 fell 13.81 points to 1,655.35, a decline of 0.8 percent.

"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 of Fed minutes this afternoon," said David Kelly, chief global strategist at J.P. Morgan Funds.

The minutes of the April 30-May 1 meeting showed that "a number" of policymakers 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.

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 three and a half 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.

The Russell 2000 index of small-company stocks, which surged above 1,000 points earlier in the day, ended up closing down 16.52 points to 982.26, a loss of 1.7 percent. The Nasdaq composite lost 38.82 points to close at 3,463.30, a decrease of 1 percent.

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.

Aside from the Fed's stimulus, 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.

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