Stocks fell back after rallying on renewed optimism about the struggling housing market.
Shares of Fannie Mae and Freddie Mac jumped after the Office of Federal Housing Enterprise Oversight said it will lift the investment caps on the mortgage lenders' portfolios, effective March 1, freeing up billions in financing that can be reinvested in the housing market.
The move opens the companies to more risk, but regulators kept in place a requirement that the firms maintain large reserves against potential losses.
Ofheo Director James Lockhart cited the companies' progress and timely results as a basis for the decision, according to a statement accompanying the decision. (Read the full text of the Ofheo statement.)
The news boosted shares of banks, homebuilders and financial-services firms, with Citigroup leading advancers on the Dow.
It also helped offset the morning's grim news from the housing sector.
The Commerce Department reported that new home sales fell2.8 percent in January to an annual rate of 588,000, the lowest in 13 years. Meanwhile, Fannie Mae reported a worse-than-expected $3.6 billion quarterly loss, and luxury home builder Toll Brothers reported it swung to a loss amid heavy writedowns for land and other assets.
There was good news on the corporate-spending front as well, as IBM said it is more confident about its U.S. business in the first quarter than it was in the fourth quarter.
Another encouraging sign for corporate spending came in the morning's durable-goods report. The headline number fell 5.3 percent, more than expected, in January, but most of that came from volatile aircraft orders. Nondefense capital goods orders excluding aircraft, a good gauge for business spending, dropped 1.4 percent, which is less than the 2 percent Wall Street had expected.
The big event of the day was on Capitol Hill, where Federal Reserve Chairman Ben Bernanke kicked off his two-day semi-annual economic testimony in Washington D.C. Bernanke told Congress that downside risks to the economy persist and that the Fed was prepared to continue lowering interest rates"to provide adequate insurance against downside risks." (Read the full text of Bernanke's testimony.)
The Fed chairman received high marks from Wall Street.
According to a new CNBC survey,
Based on the views of the 39 money managers, investment strategists and professional economists responding to CNBC's "Trillion Dollar Snap Survey" today, Bernanke earned an overall weighted-average grade of 82.7 percent or "B" — a slight improvement from the 81.4 percent, or "B-" grade, he received in January.
However, respondents felt somewhat worse about the U.S. economy, saying the probability of a U.S. recession in 2008 has increased from 47.25 percent in the January survey to 48.25 percent today.
The euro reaching a new high of $1.51 agains the dollar. Crude pulled back to about $100.46 a barrel -- after earlier topping $102 a barrel -- following news that crude inventories rose more than expected last week. Crude inventories were up 3.2 million barrels to 308,500 million barrels, higher than the 2.5 million build expected, according to a report from the Energy Information Administration.
Microsoft received a record-high $1.35 billion fine from the European Commission for defying sanctions imposed for antitrust violations. Shares of the software giant traded about 0.4 percent lower in premarket trading.
Telecom-equipment giant Nortel Networks announced plans to cut 2,100 jobsas its loss ballooned to $844 million in the fourth quarter from $80 million a year earlier.
Zale shares jumped after the struggling jeweler said it plans to close more than 100 stores and cut more than 200 jobs in order to boost profits and survive the downturn in consumer spending.