Undelivered speech by Fed official chills stocks

NEW YORK - The Federal Reserve guessing game threw the markets for another loop Tuesday.

Comments from a Fed official raised expectations that the Fed could start easing off its support for the economy soon, sending the stock market sharply lower in the late afternoon. The market recovered in the last hour to end with slight losses.

Snippets from a prepared speech by Esther George, president of the Kansas City Federal Reserve Bank, were reported in the early afternoon. George pointed to "improving economic conditions" as well as evidence that financial markets were getting dependent on the Fed's support. As a result, she said, "I support slowing the pace of asset purchases as an appropriate next step for monetary policy."

"History suggests that waiting too long to acknowledge the economy's progress and prepare markets for more normal policy settings carries no less risk than tightening too soon," George said, according to a speech she was to give in Santa Fe, N.M.

George was sick and did not give the speech, but news outlets still reported her planned comments, and the Kansas City Fed posted the speech on its website.

The Fed's bond purchases have helped keep bond prices high and yields low. The Fed's goal is to encourage borrowing and investing with low interest rates.

Many investors expect long-term interest rates to rise when the Fed scales back its bond-buying. If they climb high enough, investors may be tempted to buy bonds instead of stocks. Trying to anticipate that outcome, many traders are preemptively selling stocks on the slightest sign that the Fed may be closer to slowing its stimulus.

The current yield of 2.15 percent on the benchmark 10-year Treasury note is extremely low by historical standards. It's also nearly identical to the average dividend payment of 2.14 percent for stocks in the S&P 500.

The Standard & Poor's 500 index fell 9.04 points to close at 1,631.38, a drop of 0.6 percent. The Dow Jones industrial average lost 76.49 points to 15,177.54, a drop of 0.5 percent. The Nasdaq composite fell 20.11 points to 3,445.26, down 0.6 percent.

The price of crude oil slipped 14 cents to $93.31 a barrel and gold fell $14.70 to $1,397.20 an ounce.

Dollar General sank 9 percent, the biggest drop in the S&P 500. The discount store chain cut its earnings and revenue forecast for the year ahead because it expects sales to slow. Dollar General's stock dropped $4.91 to $48.64.