US stocks and bonds fell, both giving up earlier gains, after Federal Reserve chief Ben Bernanke suggested the central bank might scale back stimulus measures as early as at its next meeting.
"If we see continued improvement and we have confidence that that is going to be sustained, then we could in-in the next few meetings, we could take a step down in our pace of purchases," Bernanke said in response to a question from the Joint Economic Committee of Congress in Washington after his prepared testimony.
In late afternoon trading in New York, the Dow Jones Industrial Average fell 0.36 per cent, the Standard & Poor's 500 Index dropped 0.42 per cent, while the Nasdaq Composite Index sank 1 per cent. Yields on US 10-year notes climbed 10 basis points to 2.02 per cent.
"The market seized upon the bit of the Q&A exchange about the anticipated timeframe about an adjustment to QE," Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York, told Bloomberg News. "The Fed remains highly data dependent. The market is very skittish right now."
Earlier in the session, the Dow had risen to a record 15,542.40 and the S&P 500 climbed to a high of 1,687.18.
"This is a very sensitive market and particularly sensitive to any notion that tapering will come too soon," Quincy Krosby, market strategist at Prudential Financial in New York, told Reuters.
"No one wants to be selling if the data reaches the point when the Fed begins to specifically talk about tapering. The market doesn't wait for the Fed to move. It will move before. That's how it operates," Krosby said.
Bernanke's testimony to the committee had stressed concern about the recovery and risks of tapering too soon.
"In the current economic environment, monetary policy is providing significant benefits," Bernanke said. "Recognising the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions."
The Fed is buying US$85 billion in fixed-income securities a month to help revive the pace of growth in the world's largest economy.
Bernanke warned that a "premature tightening of monetary policy ... would also carry a substantial risk of slowing or ending the economic recovery."
Minutes from the latest FOMC meeting also showed concern about the pace of growth.
"Participants generally saw the economic outlook as little changed since they met in March," according to the minutes from the FOMC's April 30-May 1 meeting. "However, economic data releases over the intermeeting period were mixed, raising some concern that the recovery might be slowing after a solid start earlier this year, thereby repeating the pattern observed in recent years."
Europe's benchmark Stoxx 600 Index advanced 0.2 per cent. National benchmark indexes in Paris, London and Frankfurt also rose, gaining 0.4 per cent, 0.5 per cent and 0.7 per cent respectively.
European shares were lifted by the initial positive reaction to Bernanke's comments, closing before the Fed chairman put a potential 'sooner than expected' timeframe on tapering bond buys.