updated 5/22/2008 7:27:10 AM ET 2008-05-22T11:27:10

Wall Street pitched lower for the second straight session Wednesday as record-high oil prices and a bleak economic assessment from the Federal Reserve deepened investors’ worry that Americans may face several more months of rising costs and a shaky employment picture. The Dow Jones industrial average fell 227 points, logging its widest two-day loss since late February.

Major Market Indices

Early in the day, stocks began falling on the surging price of oil, which shot up more than $4 and breached $134 a barrel for the first time on the futures market Wednesday.

The stock market slumped further after minutes from last month’s Fed meeting revealed that while policymakers expected sharply lower economic growth and higher unemployment later this year, inflationary risks are likely to keep the central bank from cutting rates again. Lower interest rates spur economic growth, but they also tend to accelerate inflation.

High commodities prices have been a big source of anxiety for investors, as many retailers and credit card companies have noticed consumers paring back spending on discretionary items, including clothing and jewelry, to be able to afford necessities such as gasoline and groceries.

Meanwhile, the Fed’s minutes suggest the central bank’s two main priorities — making sure the economy is growing, and keeping inflation in check — are both going to be tough to achieve through monetary policy. That is a troubling prospect for investors hoping that the economy will bounce back in the second half of the year and that the central bank will be able to concentrate on controlling inflation.

“It absolutely underscores the two competing mandates for the Federal Reserve: growth, and price stability. It captures the tug-of-war between the two mandates, crystallizes how different those two mandates are,” said Quincy Krosby, chief investment strategist for The Hartford. “If employment deteriorates dramatically, the Fed has a choice — do they worry about inflationary pressure, or do they want to continue to support their growth mandate?”

According to preliminary calculations, the Dow fell 227.49, or 1.77 percent, to 12,601.19, after falling nearly 200 points on Tuesday. The blue chip index’s two-day drop of about 427 points, or 3.3 percent, is its biggest since late February.

Broader stock indicators also stumbled. The Standard & Poor’s 500 index fell 22.69, or 1.61 percent, to 1,390.71, while the Nasdaq composite index fell 43.99, or 1.77 percent, to 2,456.09.

Government bond prices rose as investors searched for safer assets. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.81 percent from 3.78 percent late Tuesday.

Crude oil soared $4.19 to settle at $133.17 a barrel on the New York Mercantile Exchange — about $20 higher than it was at the beginning of May. It passed $134 a barrel in after-hours trading.

“There’s almost a parabolic rise going on,” said Richard E. Cripps, chief market strategist for Stifel Nicolaus. “I do sense that the stock market is searching for where that oil peak is going to be ... but till it finally gets there and backs off, I think the stock market is under pressure.”

Strong demand out of China, supply disruptions in Nigeria, the dollar’s slump versus other world currencies, and political tension in the Middle East have been keeping oil on the incline.

“The factors affecting commodities, the strongest catalysts, are outside the United States,” the Hartford’s Krosby noted. “The Fed’s ability to dampen inflationary expectations have become not completely limited, but more limited than if we were having this discussion 10 years ago.”

The airline industry has been particularly slammed by the rising cost of oil. Citing high fuel prices, American Airlines said Wednesday it will start charging $15 for the first checked bag, reduce domestic flights and cut perhaps thousands of jobs. AMR Corp. shares fell $1.98, or 24 percent, to $6.22.

And although jitters over the housing-driven credit crisis have calmed since March, they are far from over. Financial stocks took a hit Wednesday after Moody’s Investors Service said it is “conducting a thorough review” regarding the possibility that computer errors incorrectly gave high quality ratings to certain debt securities that later sank in value.

“That would create some real carnage in an industry that doesn’t need it,” said Jim Herrick, manager of equity trading at Baird & Co., referring to the banks and other financial services companies that have lost billions of dollars due to bad bets on mortgages and other debt.

Among the financial services companies in the Dow, Bank of America Corp. fell 76 cents, or 2.2 percent, to $34.63; JPMorgan Chase & Co. fell $1.28, or 2.9 percent, to $42.42; Citigroup Inc. fell $1.05, or 4.8 percent, to $21.06; and American Express Co. fell $1.83, or 3.9 percent, to $45.48.

The credit crisis’ effect on the financial sector has caused it to lose its status as the largest in the S&P 500 index. Financials have been overtaken by the information technology sector — which has not been the largest sector in the S&P since mid-2001, noted Keefe, Bruyette & Woods analyst Melissa Roberts.

The dollar fell against most other major currencies, while gold prices advanced.

The Russell 2000 index of smaller companies fell 8.53, or 1.16 percent, to 727.11.

Declining issues outnumbered advancers by about 7 to 3 on the New York Stock Exchange, where volume amounted to 1.39 billion shares.

In overseas trade, Tokyo’s Nikkei closed down 1.65 percent. In Europe, London’s FTSE rose 0.10 percent, Frankfurt’s DAX declined 1.09 percent and Paris’ CAC 40 fell 0.54 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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