U.S. Stocks Erase Gain, Bond Yields Rise

Indexes retreated from earlier highs on concerns the Fed's near-zero target for interest rates will stoke inflation

By Elizabeth Stanton

Dec. 16 (Bloomberg) -- U.S. stocks erased most of their advance, the dollar strengthened and yields on 10-year Treasury notes rose to the highest level in four months on concern the Federal Reserve's near-zero target for interest rates will stoke inflation.

The Standard & Poor's 500 Index added 0.2 percent to 1,109.90 at 3:54 p.m. in New York, paring a gain of as much as 0.8 percent. The dollar rose 0.2 percent to 89.79 yen. The yield on 10-year notes touched 3.60 percent, which would be the highest closing level since August.

The Fed repeated its pledge to keep interest rates "exceptionally low" for an "extended period," driving metal producers, energy companies and banks to the steepest gains among 10 industries in the S&P 500. Policy makers restated that low interest rates are contingent on "low rates of resource utilization, subdued inflation trends, and stable inflation expectations."

"The fear is that the Fed may wait too long before they begin raising rates," said Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, which manages $2.8 billion. In the S&P 500, "when you see materials, financials and energy leading, it means the market fears higher prices and inflation. Market participants are going to the sectors that will perform well in that environment."

While repeating its pledge to keep interest rates "exceptionally low" for "an extended period," the Fed said the economy is strengthening and that most of its special liquidity facilities will expire on Feb. 1, 2010.

"Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit," the Federal Open Market Committee said in a statement after meeting in Washington. "Businesses are still cutting back on fixed investment" and "remain reluctant to add to payrolls." Deterioration in the labor market is "abating."

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

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