Stocks Fall on Rate Fears

U.S. stocks fell on Monday on renewed worries about inflation and more interest-rate increases, while tech shares slid with a drop in Google Inc. (GOOG)

Investors are worried that a speech this week from new Federal Reserve Chairman Ben Bernanke could pave the way for more rate increases. Meanwhile, on Monday afternoon, Cleveland Federal Reserve Bank President Sandra Pianalto said that easy monetary policy could boost inflation, but not job growth.

"There's this sort of malaise about what the Bernanke Fed is going to look like, and how many rate hikes are left," said Kevin Kruszenski, head of listed trading at McDonald Investments Inc. in Cleveland, Ohio. "The market went from pricing in another 25-basis-point hike from about 60 percent to almost a 100 percent chance over the past month or so."

Shares of Web search leader Google fell 4.7 percent to $345.70 on Nasdaq after Barron's, a weekly newspaper, said the stock could face a further decline of 50 percent.

Google's slide prompted investors to sell shares of other tech bellwethers, including computer companies like Microsoft Corp. (MSFT), which ranked among the top decliners in the three major U.S. stock indexes.

The Dow Jones industrial average was down 26.73 points, or 0.24 percent, at 10,892.32. The Standard & Poor's 500 Index was down 4.13 points, or 0.33 percent, at 1,262.86. The Nasdaq Composite Index was down 22.07 points, or 0.98 percent, at 2,239.81.

International Business Machines Corp. (IBM) fell 1.1 percent to $80.44 on the New York Stock Exchange and was the heaviest weight on the Dow.

The S&P financial index was down 0.3 percent, while shares of rate-sensitive stocks, including Citigroup Inc. (C), fell. Citigroup, a Dow component and the largest U.S. financial services company, slipped 0.6 percent, or 28 cents, to $45.68 on the NYSE.

An inversion in bond yields, with yields on the longer-term Treasuries below those of short-term ones, also was a bearish factor, Kruszenski said, as a rise in short-term rates increases borrowing costs for banks.

Bernanke will make his first appearance before two congressional committees this week to testify on the Fed's semi-annual monetary policy report.

Remarks by Pianalto, who is among the Fed officials who will vote on interest rates this year, probably added to the bearish sentiment in the stock market, said Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray in Minneapolis.

Expectations have been mounting that the Fed will keep raising interest rates, further than originally hoped, which is making the stock market hesitant, analysts said.

The Federal Open Market Committee has raised interest rates by a quarter percentage point at 14 consecutive meetings. Financial markets are pricing in a rate increase at the Fed's late March meeting, and have moved up chances of another hike in either May or June.

In deal news, shares of BlackRock Inc. (BLK) jumped 8 percent, or $10.48, to $141.99 on the NYSE on reports Merrill Lynch & Co. (MER) would acquire a big stake in the money manager and create a company with about $1 trillion in assets under management. Merrill shares were up 1.4 percent, or $1.04, at $73.83 on the NYSE.

Among tech stocks, the decline in Google's shares prompted investors to sell others in the sector. Microsoft slipped 1.1 percent to $26.39 and Apple Computer Inc. (AAPL) shed 3.9 percent to $64.71, both on the Nasdaq.

Barron's scenario for a steeper drop in Google's stock price is based on speculation about what may happen to analysts' 2006 revenue forecasts — if Google faces mounting competition or fraud by users of its ad-buying system.

Late Friday, Microsoft Chairman Bill Gates said the company's hardware partners will continue to develop new digital media devices aimed at challenging the dominance of Apple's iPod digital music player.

Computer makers, meanwhile, have complained to the European Commission about Microsoft's new Windows operating system being released later this year, a Commission spokesman said over the weekend.

Volume was moderate, with 1.37 billion shares changing hands on the NYSE, below last year's daily average of 1.61 billion shares. On Nasdaq, 1.68 billion shares traded, below last year's daily average of 1.80 billion.

Decliners outnumbered advancers on the NYSE by a ratio of more than 10 to 6, while on Nasdaq, about two stocks fell for every one that rose.