Inflation Talk Drops Stocks

The Dow is lower after Fed chief Bernanke expresses concern.
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Updated from 4:19 p.m. EDT

Stocks in New York closed lower Wednesday as soft economic data, surging oil prices and disquieting comments about inflation from the

Federal Reserve

chief drove the market down.

The

Dow Jones Industrial Average

lost 96.93 points, or 0.78%, to 12,300.36, and the

S&P 500

fell 12.38 points, or 0.87%, to 1417.23. The

Nasdaq Composite

dropped 20.33 points, or 0.83%, to 2417.10.

About 2.86 billion shares changed hands on the

New York Stock Exchange

, and volume on the Nasdaq reached 1.87 billion shares, with losers beating winners 2 to 1.

Fed Chairman Ben Bernanke, speaking on Capitol Hill before Congress' Joint Economic Committee, said the U.S. economy will continue to grow moderately despite near-term uncertainty in the housing sector.

"Thus far, the 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," said Bernanke. "Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters."

However, Bernanke added that "core inflation remains uncomfortably high," although it seems likely to become more manageable over time. The remarks from Bernanke were his first since the Federal Open Market Committee decided last week to keep its federal funds target unchanged at 5.25% for the sixth straight meeting.

In the policy statement, the Fed said that readings on core inflation "have been somewhat elevated," and that "the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

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

.

"Bernanke's testimony undid the hopes that the Fed will cut rates in the near term," said Peter Cardillo, chief market economist with Avalon Partners. "Once again, he put the markets on notice that inflation is a problem. Combined with the wall of worry developed over the last couple days, we were sent lower and didn't change much throughout the day."

"The traditional end-of-quarter window dressing is absent," added Cardillo. "Investors have taken a left turn, and they're increasingly conscious of the short-term inflationary problem."

Also unsettling the market was a surge in the energy complex. Crude futures jumped $1.15 to close at $64.08 a barrel in New York as concerns built about the 15 British service members still being held captive by Iran. Other energy futures finished higher, as well.

The Energy Department's latest weekly inventory figures supported the rise in prices. The report showed a decline of 900,000 barrels in crude inventories. Gasoline stocks fell by a less-than-expected 300,000 barrels, and distillates were lower by 700,000 barrels.

Little relief was found in the day's economic docket. The Commerce Department said durable-goods orders rose 2.5% in February, rebounding from a revised 9.3% decline the previous month. However, economists had expected the headline number to rise 3.5%.

Excluding transportation, orders were down 0.1% for the month, falling short of expectations for a gain of 1.8%.

Ian Shepherdson, chief economist with High Frequency Economics, said that the durable-goods report "is horrible. All the broad core categories except computers and electronics were down, while the headline number was boosted by a rebound in aircraft orders."

He also said the weather might have had some impact, but overall, "

these are awful data."

Bond prices turned lower after spending most of the territory in positive territory. The 10-year lost 5/32 to yield 4.62% and the 30-year was down 15/32 in price, yielding 4.83%.

On Tuesday, stocks gave up ground following a disappointing report on consumer confidence and an uninspiring outlook from homebuilder

Lennar

(LEN) - Get Report

.

The Dow declined for a second day, losing 71.78 points, or 0.58%, to 12,397.29. The S&P 500 slipped 8.89 points, or 0.62%, to 1428.61, and the Nasdaq shed 18.20 points, or 0.74%, to 2437.43.

On the corporate side, another member of the housing sector was making headlines for the wrong reasons.

Beazer Homes

(BZH) - Get Report

said it has received a request for documents from the U.S. attorney, who has started a criminal investigation in to its lending.

Shares of the homebuilder tumbled $2.64, or 8.4%, to close at $28.77. The Philadelphia Housing Sector Index fell 2.2%.

According to a report in London's

Times

,

General Motors

(GM) - Get Report

won't post a bid for the Chrysler arm of

DaimlerChrysler

(DCX)

. On Monday,

The Detroit News

said the first bids for DaimlerChrysler's U.S. division could come by the end of this week.

GM shed 94 cents, or 2.9%, to end the day at $31.24. DaimlerChrysler lost $1.68, or 2%, at $80.99.

Meanwhile, embattled subprime mortgage lender

New Century

(NEWC)

is expected to file for bankruptcy protection by the end of this week, according to a report in

The New York Times

. New Century, which now trades on the pink sheets, dropped 30 cents, or 21.3%, to $1.11.

Among analyst moves, AG Edwards initiated coverage of

Yahoo!

(YHOO)

with a buy rating and a stock price target of $35. The firm said it expects Yahoo!'s Panama model to help increase search advertising revenue. Yahoo! eased 14 cents, or 0.4%, at $31.41.

AG Edwards also started Yahoo!'s Internet rival

Google

(GOOG) - Get Report

as a buy. While the brokerage believes Yahoo! is beating Google in regards to display advertising, AG Edwards said it expects Google to continue innovating and improving efficiencies within its core product. The stock finished down $1.74, or 0.4%, at $461.88.

Elsewhere, Banc of America Securities upgraded Dow component

Citigroup

(C) - Get Report

to buy from neutral, saying the potential rewards outweigh the risks of owning the stock. Still, Citigroup was off 10 cents, or 0.2%, at $50.96.

Turning to markets elsewhere, Asia and Europe traded to the downside. Tokyo's Nikkei 225 lost 0.6% to 17,255, and Hong Kong's Hang Seng gave back 0.8% to 19,554. The London FTSE 100 was weaker by 0.2% at 6280, and Frankfurt's Xetra DAX surrendered 0.5% to 6821.