Wall Street slid after a US Federal Reserve official fuelled concern that the central bank might raise interest rates sooner than anticipated.
In an interview with Fox Business Network, St Louis Fed President James Bullard said the US economy is doing much better than most realise. While admitting the larger-than-expected contraction in first-quarter gross domestic product gave him "heartburn", Bullard also suggested it was not indicative of the economic outlook.
"It looks like the first quarter was an aberration," Bullard said. "You are basically going to be near normal on both dimensions basically later this year. That's shocking, and I don't think markets, and I'm not sure policymakers, have really digested that that's where we are."
Bullard predicts the central bank will lift its benchmark rate by the end of in the first quarter of 2015.
"The [Federal Open Market] Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run," according to a Fed statement earlier this month.
Bullard, who is not a voting member of the policy-setting FOMC this year, won't vote again until 2016.
"This has been the great debate taking place in the market: When will the normalisation of policy begin?" Henk Potts, a strategist at Barclays Wealth & Investment Management in London, told Bloomberg News. "The Fed is starting to give clues about what the exit strategy will look like. What investors should really be focused on is not when the rate rise comes through, but the speed of further rate rises and how that's going to play out."
Meanwhile, a Commerce Department report showed weaker-than-expected US consumer spending, increasing 0.2 percent in May, after being steady in April.
But analysts, like Bullard, point to more recent signs that justify optimism about the outlook.
"We have evidence of consumer spending continuing at a very good pace in June. That limits my concerns," Anthony Karydakis, chief economic strategist at Miller Tabak in New York, told Reuters.
In a separate report, the Labor Department said new applications for state unemployment benefits fell 2,000 to a seasonally adjusted 312,000 for the week ended June 21.
In the final hour of trading in New York, the Dow Jones Industrial Average fell 0.12 percent, the Standard & Poor's 500 Index declined 0.16 percent, while the Nasdaq Composite Index dropped 0.1 percent.
Declines in shares of Wal-Mart, last down 1 percent, and those of Microsoft, last down 0.9 percent, led the slide in the Dow.
Shares Bed Bath & Beyond sank, last down 7.3 percent, after the company offered an outlook that fell short of expectations.
In Europe, the Stoxx 600 Index finished the session marginally lower from the previous close at 341.86. CAC 40 fell 0.5 percent, while Germany's DAX declined 0.6 percent. The UK's FTSE 100 eked out a gain of just under 0.1 percent.
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