- The Washington Times - Tuesday, June 5, 2007

NEW YORK (AP) — Wall Street skidded lower yesterday after comments from Federal Reserve Chairman Ben S. Bernanke and a strong reading on the service sector suggested the central bank has little reason to lower interest rates.

Mr. Bernanke’s speech via satellite to an international monetary conference in South Africa yesterday spurred investors to sell a day after the Dow Jones Industrial Average and the Standard & Poor’s 500 Index edged up to new highs. Mr. Bernanke remarked that the economy will recover from its recent feeble performance, despite a housing slump that he said could be a drag on the economy for longer than anticipated.

His forecast for rebounding growth, as well as his assessment that inflation is “ebbing” but remains “somewhat elevated,” made it appear unlikely the Fed will lower rates any time 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.

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. His remarks also came in a week in which investors had few economic or corporate catalysts to provide direction.

The Institute for Supply Management issued its service sector report yesterday. The ISM’s non-manufacturing index came in at 59.7 in May, higher than expected and up from April’s reading of 56. A reading above 50 indicates expansion in the service sector, a diverse group of industries that represents about 80 percent of U.S. economic activity. Investors want to see growth but worry that if it’s too robust, it could prompt a rate increase.

The Dow fell 80.86, or 0.59 percent, to 13,595.46, after earlier falling more than 100 points.

Broader indexes also retreated. The Standard & Poor’s 500 Index fell 8.23, or 0.53 percent, to 1,530.95, while the Nasdaq Composite Index shed 7.06, or 0.27 percent, to 2,611.23.

Before yesterday’s decline, the Dow and the S&P; 500 had risen more than 8 percent since the beginning of the year.

Bonds slipped after Mr. 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.

The yield on the benchmark 10-year Treasury note rose to 4.98 percent from 4.93 percent late Monday. The 10-year yield is trading at nine-month highs, and appears poised to break through 5 percent, a level not reached since August 2006.

Stocks sold off further after a midday speech by U.S. Treasury Secretary Henry M. Paulson Jr., who said he has been pressuring China to make its exchange rate more flexible. If the yuan is given the chance to rise in value, it could have a dampening effect on the U.S. dollar.

The dollar fell against other major currencies, while gold prices edged lower.

Avaya said late Monday it agreed to an $8.2 billion offer by private equity firms Silver Lake and TPG Capital. Avaya rose 31 cents to $17.03.

Retail stocks took a hit after home goods seller Bed Bath & Beyond late Monday warned its fiscal first-quarter earnings may fall below estimates. The stock lost $2.20, or 5.4 percent, to $38.27.

The biggest decliner in the Dow was DuPont, downgraded by Lehman Brothers to an “equal weight” rating from “overweight.” The chemicals company fell 95 cents to $52.24.

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