M. Spencer Green  /  AP
Damon Federighi shouts orders in the euro dollar futures pit at the Chicago Mercantile Exchange Tuesday after the Federal Reserve raised a key lending rate by a quarter-percentage point, roiling the bond and equity markets.
updated 3/23/2005 7:12:58 AM ET 2005-03-23T12:12:58

Investors yanked their cash out of the stock market Tuesday, leaving stock indices at their lowest levels in months, after the Federal Reserve confirmed Wall Street’s fears that inflation poses an increasing threat to the economy.

As expected, the Fed’s Open Market Committee raised the nation’s short-term benchmark interest rate by a quarter-percentage point to 2.75 percent. But in its policy statement the Fed noted that “pressures on inflation have picked up in recent months,” which analysts said was a sign that inflation could be a growing problem for the economy.

“The Fed conceded that there’s a bit more inflation in the near term than people were expecting to hear about,” said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. “And if you get short-term inflation, there’s the danger of it extending into the long term, and that means higher interest rates and lower multiples for equities.”

The Fed, however, kept its “measured pace” language, which Wall Street has taken to mean steady quarter percentage point rate hikes in the future. A faster, more aggressive pace of rate hikes would make it difficult for companies to borrow the money needed to grow, and could stifle the overall economy.

The Dow Jones industrial average, which had been in positive territory before the Fed’s announcement, was down 94.88 points, or 0.9 percent, at the close of trading. It was the blue-chip index’s lowest close since Jan. 28.

The broader Standard & Poor’s 500-stock index finished Tuesday down 12.07 points, or 1 percent, also its worst close since Jan. 28, while the Nasdaq composite index lost 18.17 points, or 0.9 percent, falling to its lowest closing level since Nov. 2.

Oil prices fell substantially in what traders said was profit-taking ahead of Wednesday’s inventory report from the U.S. Energy Department. A barrel of light crude for May delivery settled at $56.03, down $1.43 on the New York Mercantile Exchange.

Bonds also sold off sharply after the Fed’s announcement, with the yield on the 10-year Treasury note rising to 4.62 percent, its highest level since late July. The U.S. dollar was mixed, but gaining against most major currencies. Gold prices slid to one-month lows.

Before the Fed’s decision the Labor Department’s Producer Price Index, a key inflation measure, gave Wall Street an early dose of enthusiasm. Wholesale prices climbed 0.4 percent, largely due to high energy prices. With volatile food and energy prices removed, “core” PPI rose just 0.1 percent, in line with economists’ expectations.

But given the choice between surprisingly higher interest rates or the Fed’s measured pace, the reprieve from the PPI figure was temporary, as nearly any stance issued by the Fed would have raised the market’s fears.

Among individual stocks, Alcoa, a Dow component, said it will eliminate 2,000 jobs over the next year to streamline its operations, and expects to record one-time restructuring charges. The company also will sell its 46.5 percent stake in Norwegian metals and energy group Elkem ASA for about $870 million. Alcoa’s share price fell 50 cents to $30.96.

Major Market Indices

American International Group’s stock price slumped $1.70 to $56.20 after the company fired its chief financial officer and another executive, saying the two were refusing to cooperate with government investigators. State and federal regulators are looking into the insurer’s business practices.

General Motors again struggled with bad news about its finances. The Financial Times reported the automaker has backed out of an agreement that allowed earlier payments to its suppliers. GM’s stock price fell 15 cents to $29.54.

Home builder Lennar announced a 39 percent jump in profits for the quarter, beating Wall Street’s earnings forecasts by 16 cents per share. The company also raised its full-year earnings forecasts to $7.15 per share, up from $6.90 per share. Lennar’s share price rose 73 cents to $55.60.

Cereal and yogurt producer General Mills’ shares fell $2.10 to $49.42 after accounting changes and the sale of European holdings pushed the company to a quarterly loss. The company still managed to beat analysts’ forecast by 4 cents per share.

Overseas, Japan’s Nikkei stock average fell 0.3 percent. In Europe, Britain’s FTSE 100 was up 0.1 percent, France’s CAC-40 rose 0.4 percent and Germany’s DAX index added 0.6 percent.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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