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Fed chief's 'fiscal cliff' warning hits markets hard

NEW YORK — A warning from Federal Reserve chairman Ben Bernanke about the dangers of the "fiscal cliff" weighed on the market in afternoon trading, sending the Dow Jones Industrial Average down by as much as 94 points shortly after Bernanke spoke.

But the stock market crept higher through the late afternoon and ended the day flat. The Dow dropped 7.45 points to close at 12,788.51. The Standard & Poor's 500 index gained 0.92 points to 1,387.81. The Nasdaq composite index gained 0.61 points to 2,916.68.

The yield on the benchmark 10-year U.S. Treasury note rose to 1.66 percent.

On Monday, the Dow soared 207 points as investors focused on prospects for a deal between the White House and congressional Republicans to avoid the cliff, tax increases and government spending cuts set to take effect Jan. 1.

In a speech to the Economic Club of New York on Tuesday, Bernanke urged Congress to take action. Asked in a question-and-answer session whether the Fed could limit the economic hit posed by the budget-tightening measures, Bernanke said: "If the economy goes off the broad fiscal cliff, I don't think the Fed has the tools to offset that."

Many investors expect financial markets to turn turbulent when Congress returns from its Thanksgiving recess and begins bargaining with the White House to avoid the fiscal cliff.

John Linahan, head of T. Rowe Price's U.S. equity group, said that if those negotiations stretch into late December, the stock market could resemble the wild trading of August 2011, when markets flipped from big gains one day to steep losses the next.

Fed chief's 'fiscal cliff' warning hits markets hard 11/20/12 [Last modified: Tuesday, November 20, 2012 9:53pm]
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