Russell closes in the red

Small-cap stocks edged lower Tuesday, pulled down by hawkish comments from the Federal Reserve that spurred concerns among investors that the next rate move might be a hike to protect against rising inflation expectations. The Russell 2000 (NYSE:IWM) lost 2.63, or 0.36%, to 732.62, the lowest daily close since May 23.

Last night, Fed Chairman Ben Bernanke said that the central bank will resist rising long-term inflation, and he intimated that the economy wasn’t too fragile to move price concerns to the forefront of policy decisions. The fear of higher rates amid a sluggish economic environment ignited a global rout on stocks and bonds coming into the U.S. trading session, and stoked stagflation fears this morning. Several other Fed officials and policy makers from around the world joined in on the anti-inflation talk, magnifying the seemingly new hard stance on price issues.

It’s quite possible that the Fed and other central bank officials around the globe are simply jawboning against inflation to see what kind of response they can illicit from the market. After all, Fed is historically loathe to raise interest rates when the unemployment rate is still rising, and it’s hard to forget the surprise 0.5% jump in unemployment to 5.5% in last Friday’s jobs data — the largest one-month percentage rise in unemployment in 22 years.

With bonds and stocks sinking this morning in the wake of Bernanke’s inflation saber-rattling, investors looked for a safe-haven within equities, and found it among Dow stocks with solid earnings. The result was that the Dow soundly outperformed the Russell 2000, and the spread between the two index products narrowed. The Russell 2000 has been charging against the Dow for the last two weeks, so a pullback in the spread is not surprising. The last time the Russell made a similar dramatic run against the Dow was in mid-March, when the market was attempting to forge a bottom.

The dollar was the direct immediate beneficiary of Bernanke’s remarks, shooting 1% against the yen to three-month highs, and gaining a whopping 200 basis points, or 1.3%, against the euro. The strong dollar helped spark a reversal slide in crude oil prices, which were up some $2 a barrel in the early going today, but shed . . .

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