Stocks retreat over renewed rate fears
NEW YORK » A Federal Reserve official's warning about a possible resumption of interest rate hikes rattled Wall Street yesterday, wiping out an early advance and leaving stocks narrowly higher by the close.
The comments by Chicago Fed President Michael Moskow unnerved investors looking to revive last week's rally after having collected profits on Monday. Retailers and other sectors dependent on consumer spending stumbled after Moskow said, "some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time."
The Fed left interest rates unchanged earlier this month after raising them 17 straight times. Wall Street has rallied since then on hopes this would be the end, but one analyst said Moskow's comments could be "putting out a trial balloon" to gauge the market's reaction to a continuation of rate hikes.
"The market has discounted the likelihood of another rate increase by about a 20 percent chance for the next meeting" in September, said Scott Merritt, a U.S. equity strategist for JPMorgan Asset Management. "He might want to get that up to 50 percent to get more flexibility. If expectations get too high or low, (Fed Chairman Ben) Bernanke can't really go against it or he'll lose credibility."
The Dow Jones industrial average dipped 5.21, or 0.05 percent, to 11,339.84 after been up more than 38 points early in the session. Advancers beat decliners in relatively light summer trading on the New York Stock Exchange and the Nasdaq Stock Market.
Broader stock indicators edged higher. The Standard & Poor's 500 index rose 1.30, or 0.10 percent, to 1,298.82, and the Nasdaq composite index gained 2.27, or 0.11 percent, to 2,150.02.
Ten-year treasury bond yields have been trading near their lowest in five months, inspired by data last week that indicated the Federal Reserve's attack on inflation was working. Several economic reports issued last week -- including one that showed benign inflation data -- help convinced investors the economy was headed toward a "soft landing."
Wall Street wants the economy to slow so inflation is contained but still grow enough to keep corporate profits strong. Moskow's comments helped reverse the effects of last week's gains.
The market initially ramped up after Iran's top nuclear negotiator committed to "serious negotiations" over its nuclear ambitions, giving hopes that Middle East tensions might ease.