A speech by Kansas City Federal Reserve Bank President Thomas Hoenig drove afternoon selling after he said keeping interest rates too low for too long would encourage risky financial behaviour.
Energy stocks led the declines, with the S&P energy index falling one per cent, and Dow component Exxon Mobil sliding 0.8 per cent to $67.34. Crude oil futures fell 1.1 per cent to $85.88 a barrel after data showed domestic inventories rose last week.
The Federal Reserve’s near-zero interest-rate policy has underpinned a rally of almost 75 per cent since the 9 March 2009, low, and the removal of easy money is one of the market’s biggest fears.
Hoenig, however, was the sole dissenter at the most recent Fed meeting, advocating higher rates.
“It looks like what the market is latching onto is Thomas Hoenig – the lone dissenter of the idea of not raising rates – had some very strong comments,” said Scott Marcouiller, senior equity market strategist at Wells Fargo Advisors in St. Louis.
“The real reason is it’s a short-term extended market that’s vulnerable to short-term pullbacks and this is what it's using as the excuse.”
The Dow Jones industrial average fell 72.47 points, or 0.66 per cent, to 10,897.52. The Standard & Poor’s 500 Index slipped 6.99 points, or 0.59 per cent, to 1,182.45. The Nasdaq Composite Index lost 5.65 points, or 0.23 per cent, to 2,431.16.
In contrast, Federal Reserve Chairman Ben Bernanke said the US economy still faces significant headwinds, suggesting he was in no rush to raise interest rates.
The CBOE Volatility Index, Wall Street’s fear gauge, gained 2.4 per cent after closing on Tuesday at a two-and-a-half-year low. Despite the gain, the Volatility Index remains at low levels, suggesting a complacency among investors.
Data from the Investment Company Institute showed domestic equity funds had outflows of $64m for the week ending 31 March, the second consecutive week of outflows.