NEW YORK (AP) — Treasury yields rose Tuesday, and U.S. stock indexes fell after the head of the Federal Reserve said that he's feeling more optimistic about the economy.
The testimony by Fed Chairman Jerome Powell before Congress was highly anticipated, and investors dissected his every word for indications that the central bank will get more aggressive about raising interest rates in the face of a growing economy and potentially higher inflation.
KEEPING SCORE: The Standard & Poor's 500 was down 16 points, or 0.6 percent, at 2,763, as of 1:50 p.m. Eastern time. It is coming off a three-day winning streak and is now down 3.8 percent from its record high, which was set last month. The index had been down as much as 10 percent earlier this month.
The Dow Jones industrial average fell 97, or 0.4 percent, to 25,617, and the Nasdaq composite dropped 45, or 0.6 percent, to 7,376.
FED SPEAK: Powell made his first public comments as head of the Federal Reserve, and he reaffirmed to the House Financial Services Committee that the central bank plans to raise interest rates gradually as the economy improves.
The Fed increased rates three times last year and has signaled that another three increases may be coming in 2018. The market got spooked last month when potential signs of inflation strengthened, which raised speculation that the Fed may speed up its timetable and knocked stock prices down by 10 percent around the world.
"My personal outlook for the economy has strengthened since December," Powell said in response to a question about whether the recently passed tax cut and other moves by Congress have changed his outlook for how quickly the Fed will raise interest rates.
RATE EFFECT: Treasury yields began jumping as Powell said recent reports on the economy have been encouraging.
The yield on the 10-year Treasury note climbed to 2.91 percent from 2.86 percent late Monday. It had been down earlier in the morning.
The two-year Treasury yield, which is more influenced by expectations for Fed movements, climbed to 2.26 percent from 2.23 percent.
MARKET EFFECT: If the Fed does raise rates four times this year, it could upset markets when many investors have been preparing for only three increases, said Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments.
Higher interest rates generally mean lower price-earnings ratios for the stock market, which means that for stocks to rise or even stay steady, corporate earnings will need to grow strongly under such a scenario.
What may make things even more muddled is how long it's been since investors have had to contend with a market where inflation is a threat and interest rates are rising, Weiss said. The last time was before the 2008 financial crisis.
"You have a generation of brokers and advisers who have not experienced this side of the economic cycle," he said.
DIVIDENDS DULLED: Stocks that pay big dividends had some of the market's steepest losses after Treasury yields rose. When bonds are paying more in interest, they can divert buying by income investors away from dividend-paying stocks.
Real-estate investment trusts in the S&P 500, which are among the biggest dividend payers, lost 1.7 percent for the biggest loss among the 11 sectors that make up the index. Utilities fell 1.3 percent.
SKY SALE: Comcast had one of the biggest losses in the S&P 500 after it launched a bid for European pay TV broadcaster Sky. The buyout offer is for 22.1 billion pounds ($29.5 billion), and Comcast's Class A shares lost $2.18, or 5.5 percent, to $37.40.
Shares of Walt Disney also fell because the Comcast bid could disrupt its takeover offer for 21st Century Fox. Disney lost $4.43, or 4 percent, to $105.38.
REGISTERS RINGING: Macy's jumped to one of the biggest gains in the S&P 500 after the retail giant reported sales and profits that were comfortably ahead of expectations. It also gave a forecast for 2018 earnings that was higher than analysts expected.
Macy's rose $1.20, or 4.4 percent, to $28.65.
MARKETS OVERSEAS: Stock indexes were mixed in Europe, with France's CAC 40 close to flat and Germany's DAX down 0.3 percent. The FTSE 100 in London was down 0.1 percent.
In Asia, Japan's Nikkei 225 jumped 1.1 percent, South Korea's Kospi dipped 0.1 percent and the Hang Seng in Hong Kong lost 0.7 percent.
COMMODITIES: Benchmark U.S. crude fell 74 cents to $63.17 per barrel. Brent crude, the international standard, dropped 77 cents to $66.52 per barrel.
Gold fell $13.90 to $1,318.90 per ounce.
CURRENCIES: The dollar rose to 107.29 Japanese yen from 106.91 yen late Monday. The euro dipped to $1.2243 from $1.2312, and the British pound fell to $1.3929 from $1.3968.