Real Story: Bernanke's Bind

It was a bad day for the bulls, as stocks and Treasuries each heard the worst from Federal Reserve Chairman Ben Bernanke's congressional testimony, TheStreet.com's Editor-at-Large Aaron Task says on Wednesday's Real Story podcast.

The chairman's comments that "weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy," spooked stock traders because it makes a near-term rate-cut less likely.

In reaction, the Dow Jones Industrial Average fell 97 points, or 0.8%, while the S&P 500 lost 0.9%, and the Nasdaq fell 0.8%.

Meanwhile, Bernanke's insistence that the Fed's "predominant policy concern remains the risk that inflation will fail to moderate as expected" was displeasing to Treasury traders because inflation erodes the value of fixed-income securities.

The 10-year Treasury fell 5/32, its yield rising to 4.62% while the 30-year bond lost 15/32 to yield 5.83%.

Perhaps what really upset financial markets today is a sense that the Fed is stuck between the proverbial rock and a hard place, Task says. Bernanke may want to cut rates to prevent a subprime spillover and more weakness in business spending -- as revealed in the day's durable-goods numbers. But he doesn't want to unleash more virulent inflation by cutting rates and devaluing the dollar.