- The Washington Times - Monday, June 5, 2006

NEW YORK (AP) — Inflation fears sent stocks plunging yesterday as jitters over high oil prices exacerbated signals that the Federal Reserve will keep lifting interest rates to contain price increases. The Dow Jones Industrial Average sank nearly 200 points.

Fed Chairman Ben S. Bernanke told an international monetary conference that although rising energy costs have helped slow the pace of economic growth, core inflation — excluding energy and food — was near the central bank’s tolerance level and could warrant further rate tightening.

The news stunned investors who had grown hopeful that the Fed was almost finished raising rates after data showed signs that the economy was beginning to cool. But with Mr. Bernanke repeating that inflation still posed a problem, traders worried about higher interest rates in a slowing economy limiting the potential for stocks to make long-term gains.

“In reality, nothing’s really changed,” Steve Neimeth, senior vice president and portfolio manager at AIG SunAmerica, said of the prospect for more rate increases. “But now, Bernanke has finally said the consumer is weak and that inflation is at the high end of the Fed’s range. The market’s basically nervous that they’ve gotten a clear signal from him.”

Stocks were already under pressure from a jump in oil prices fueled by Iran’s threat to cut oil exports if Western nations punish or attack the country over its nuclear arms program, unnerving a market already concerned that severe hurricanes could devastate Gulf Coast refineries again this summer.

At the close, the Dow plunged 199.15, or 1.77 percent, to 11,048.72. The Dow is 5.1 percent below a six-year high of 11,642.65, reached May 10.

Broader stock indicators also slumped. The Standard & Poor’s 500 Index dropped 22.93, or 1.78 percent, to 1,265.29; the Nasdaq Composite Index fell 49.79, or 2.24 percent, to 2,169.62, falling into negative territory for the year.

Bonds slipped after Mr. Bernanke’s speech increased the likelihood that the Fed will boost interest rates again at its June 28-29 meeting. The yield on the 10-year Treasury note rose to 5.02 percent from 5 percent late Friday.

Elsewhere, the U.S. dollar recovered slightly against the Japanese yen and was flat versus European currencies. Gold prices returned to about $650 an ounce.

Overseas stock markets saw persistent weakness from worries about slowing global demand. Japan’s Nikkei stock average slumped 0.77 percent, Britain’s FTSE 100 gained 0.04 percent, Germany’s DAX index plunged 1.16 percent and France’s CAC-40 was lower by 0.88 percent.

Tension over Iran’s nuclear activity drove up a barrel of light crude 27 cents to $72.60 on the New York Mercantile Exchange.

Given the uncertainty about interest rates and inflation, consumer confidence readings later this month will be a critical aspect of the economic picture, said Scott Fullman, chief investment strategist for Hapoalim Securities USA Inc.

“This concern over oil is really the driving force of the market,” Mr. Fullman said. “We’re coming into vacation season. [Energy prices] are going to play an awful lot on how consumers will be spending their money this summer.”

Oil-related stocks sold off earlier gains despite the boost in crude prices. Chevron Corp. dropped $1.40 to $59.35, ConocoPhillips fell $1.97 to $62.54 and Exxon Mobil Corp. fell $1.60 to $60.05. Drilling services firm Halliburton Co. declined $2.53 to $74.25.

Harrah’s Entertainment Inc. stumbled after it last week lost a bid to build a new casino resort in Singapore to rival Las Vegas Sands Corp. Harrah’s fell $1.15 to $75.25, and Las Vegas Sands slid $1.35 to $69.25.

Declining issues outpaced advancers by almost 4-to-1 on the New York Stock Exchange, where preliminary consolidated volume of 2.36 billion shares topped the 2.34 billion shares that changed hands Friday.

The Russell 2000 Index of smaller companies tumbled 23.53, or 3.19 percent, to 713.92.

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