NEW YORK – U.S. stock prices sold off Tuesday, after the Federal Reserve once more lifted the overnight rate by a quarter-point and sent a bold signal that it intends to raise rates again.
Analysts had widely, but not unanimously, expected the quarter-point increase in the benchmark rate to 3.75 percent.
The Dow Jones Industrial Average closed down 76.11 points at 10,481.52, while the S&P 500 fell 9.68 to 1,221.34.
The Nasdaq composite fell 13.93 points to 2,131.33.
The 9-1 vote to increase the federal funds target rate left the key interest rate at its highest level since June 2001.
In its accompanying policy statement, the Fed said Hurricane Katrina could fuel inflationary pressures, but does not pose a persistent threat to the U.S. economy.
The statement also preserved the phrase “measured pace,” a clue that the Fed intends to lift rates again.
“The surprise is that they didn’t change the wording of the statement very much. They used accommodative’ and they used measured’ and those are code words in investors minds suggesting they don’t have in mind any pause in the next meeting either,” said Al Kugel, chief investment strategist at Atlantic Trust/Stein Roe.
The FOMC has raised rates 11 times since June 2004 in an effort to bring the fed funds rate to a more neutral level – that is, a level where rates are not triggering inflation or slowing growth.
Although investors had hoped the central bank would back off its rate hikes program, using the devastation of Katrina as an excuse, Barry Hyman, equity market strategist at Ehrenkrantz, King & Nussbaum, pointed out that the Fed policy affirms the economic strength of the U.S.
The Fed’s move indicates that the central bank “sees the economy as very resilient,” he said.
However, Kugel worried about the rationale behind the move. “The fact they didn’t really express any more concern about inflation makes it a little harder to understand why they continue to move forward with the rates,” he said.
—
OUTSIDE THE FED
Earlier the Commerce Department reported that new residential construction slipped a greater-than-expected 1.3 percent in August.
Crude and natural-gas prices remained lower despite news that Hurricane Rita is pointing toward the Florida Keys and may pass over the already stricken Gulf of Mexico region.
The tropical storm recently became a hurricane, stoking worries of further devastation in a region that has not yet recovered from Hurricane Katrina and of possible disruptions to oil supplies.
Crude for October delivery settled down $1.16 at $66.23 a barrel, while natural gas futures finished 1.4 percent lower at $12.492 per million British thermal units. Prices eased after news that OPEC agreed to make an additional 2 million barrels of oil a day available.
The Treasury market initially was lower after the Fed, but later turned mixed. Analysts said the rate hike weighs on short maturities, but longer maturities improve as the Fed is seen as taking a counter- strike against inflation
The benchmark 10-year Treasury note closed unchanged at 100 with a yield of 4.25 percent, while the two-year Treasury ended down 4/32 at 100 with a yield of 4.01 percent.
The Fed move was dollar-supportive, making the currency more attractive than its competitors. The dollar last was up 0.04 percent at 111.92 yen as the euro fell 0.02 percent to $1.2123.
Gold futures backed off their recent historic highs to close down 40 cents at $470 an ounce.
—
STOCKS ON THE MARCH
Delphi Corp. shares fell 10.3 percent to $3.02, a new all-time low as the company continued negotiations with General Motors, its biggest customer, aimed at staving off bankruptcy.
Chemtura dropped almost 23 percent to $11.70 after the maker of specialty chemicals warned it will not meet Wall Street’s earnings expectations, due partly to the impact of Hurricane Katrina and partly to shortfalls in its Great Lakes region.
Shares of Goldman Sachs lost early gains to close down 23 cents at $118.05, after the brokerage reported third-quarter revenue of $7.3 billion, up from $4.5 billion a year before and outstripping the Thomson First Call estimate of $5.6 billion.
Circuit City Stores Inc. vaulted 5.9 percent higher to $16.43. The company swung to a second-quarter profit of $1.3 million, or 1 cent a share, from a year-ago loss of $11.9 million, or 6 cents. Analysts were looking for a loss, on average, of 3 cents a share and sales of $2.44 billion, according to Thomson First Call.
Shares of cosmetics seller Estee Lauder fell almost 10 percent to $36.48 after the company cut its first-half profit outlook and J.P. Morgan downgraded the shares to neutral from overweight.
—
BROKER CALLS
Lehman Brothers downgraded bottlers Coca-Cola Enterprises, Pepsi Bottling Group and PepsiAmericas.
The broker cited a recent rise in energy prices, and said volume growth is likely to be sluggish and more volatile as bottlers and retailers use pricing to cover some of these cost pressures.
Coca-Cola Enterprises dropped 1.6 percent to $19.13, Pepsi Bottling fell 3.4 percent to $27.09 and PepsiAmericas gave up 4 to close at $23.25.
—
(c) 2005, MarketWatch.com Inc.
Visit MarketWatch on the Web at http://www.marketwatch.com
Distributed by Knight Ridder/Tribune Information Services.
—–
GRAPHICS (from KRT Graphics, 202-383-6064):
AP-NY-09-20-05 1725EDT
Comments are no longer available on this story