Stocks Rocked as Financial Worries Persist

Updated from 2:04 p.m. EDT

Stocks were registering heavy losses Tuesday afternoon as Federal Reserve Chairman Ben Bernanke pointed to increased downside risk for the U.S. economy and hinted that his agency may reduce its target interest rate.

The Dow Jones Industrial Average was recently down 317 points to 9637, and the S&P 500 was losing 37 points to 1019. The Nasdaq lost 73 points to 1789.

Addressing the National Association for Business Economics in Washington, D.C., Bernanke said that the outlook for inflation has for the moment improved while growth potential has diminished, and said the bank would need to reconsider its current policy, a hint that his agency may soon cut its target interest rate.

Earlier, the Fed announced creation of a new lending facility to buy short-term commercial paper from businesses and said it expects the new lending program to remove the stoppage in the credit markets.

The Fed's decision to begin buying commercial paper is "a radical change in the nature of the Fed," said Dirk Van Dijk, director of research at Zacks Equity Research. He said that the Fed is now essentially making unsecured loans to corporations. "The commercial paper market was the most constipated of all the financial markets," said Van Dijk. Getting commercial paper moving makes some sense, he said, although the actual impact of the Fed's move remains to be seen.

Lending among banks was stagnant or worsening. Three-month Libor, the rate banks charge one another for large, short-term loans, was at 4.32%, remaining at levels last seen in January. The rate for overnight interbank dollar loans skyrocketed to 3.94% from 2.25%.