Ben's Bomb Shatters Stocks

Updated from 4:05 p.m. EDT

Another dour reading on the economy, this one from Federal Reserve Chairman Ben Bernanke, clobbered stocks Monday, as the twin specters of inflation and recession continued to haunt Wall Street.

The Dow Jones Industrial Average fell 199.15 points, or 1.77%, to 11,048.72, while the S&P 500 declined 22.93 points, or 1.78%, to 1265.29. The Nasdaq Composite plunged 49.78 points, or 2.24%, to 2169.62. The 10-year Treasury bond fell 7/32 in price to yield 5.02%.

Speaking to a monetary conference in Washington, Bernanke noted that inflation readings "have been higher in recent months" and "are unwelcome." He also said the policymaking Federal Open Market Committee "will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained."

At the same time, Bernanke was cautious on the economy, saying "the anticipated moderation of economic growth seems now to be under way. Consumer spending, which makes up more than two-thirds of total spending, has decelerated noticeably in recent months."

The assessment, made around 2 p.m. EDT, extended already heavy losses in the stock market that stemmed from rising oil prices. While virtually every sector ended lower, the heaviest selling occurred in economically sensitive sectors such as energy, metals and commodities, and in speculative sectors such as biotech and semiconductors.

Monday's fall continues a period of high volatility in the stock market. Last Tuesday, the Dow plunged 184 points and the Nasdaq lost 46 points on nearly identical comments about inflation from Chicago Fed President Michael Moskow. While that decline was erased in subsequent sessions, the rout was the fourth time in May that the Dow had lost more than 100 points in a single session.

Barry Hyman, equity market strategist with EKN Financial, said Bernanke described an economic situation the market doesn't want to hear.

"Being inflation-vigilant when you're acknowledging an economic slowdown is not what investors want," he said. "That scenario borders on stagflation, which is a death sentence for equities should it occur. It's clear that the market is due for more corrective behavior."

After Bernanke's comments, the odds of a 25-basis point hike at the Fed's meeting later this month jumped to 76% from 50%. The Fed has raised short-term rates by 400 basis points in the last two years, and the fed funds rate is now 5%.

To view Gregg Greenberg's video take on today's market, click here.