updated 9/21/2005 7:11:16 AM ET 2005-09-21T11:11:16

Investors concerned about slowing economic growth sent stocks sharply lower Tuesday after the Federal Reserve said it would continue raising interest rates despite Wall Street’s worries about the economic impact of Hurricane Katrina.

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While some investors had hoped for a pause in rate hikes after the hurricane, the Fed — concerned about high oil prices and their potential to spark inflation — raised the nation’s benchmark rate by a quarter percentage point to 3.75 percent. The Fed said the destruction along the Gulf Coast, while hampering economic activity short-term and pressuring the stock market, did not pose “a more persistent threat” to the overall economy.

Instead, the Fed said it would stick to its policy of gradual, measured rate hikes. While that may keep inflation in check, the move would make it more expensive for individuals and companies to borrow money — something that investors feared could hinder economic expansion.

“I would read it as a very hawkish statement under the circumstances, barely paying lip service to the potential threat to the economy from Katrina,” said Chris Piros, director of investment strategy for Prudential’s Strategic Investment Research Group. “They’re saying they have an obligation to maintain price stability and fight inflation, but no obligation on economic growth or anything else.”

At the close of trading the Dow Jones industrial average was down 76.11 points, or 0.7 percent, while the broader Standard & Poor’s 500-stock index was off 9.68 points, or 0.8 percent. The Nasdaq composite index gave up 13.93 points, or 0.7 percent.

Oil prices fell sharply during the session , though regained some of the losses as Hurricane Rita strengthened as it passed between Florida and Cuba on an expected path toward the Gulf of Mexico’s oil production and refining centers.

The markets were mostly unfazed as the Commerce Department reported a decline in new home construction , a possible sign of a cooling housing market. Construction of new homes and apartments dropped 1.3 percent last month after a decline of 1.5 percent in July, the first back-to-back declines in housing starts in 17 months.

As long as the drop in construction remains moderate, and consumer spending can remain strong, the economy would likely continue to grow, albeit at a slower pace. Earlier, stocks moved higher as Circuit City Stores Inc. posted a surprise profit for the third quarter, reassuring Wall Street that consumer spending is robust.

Circuit City posted earnings of a penny per share, better than the 3-cent-per-share loss expected on Wall Street. The electronics retailer jumped 83 cents to $16.34, while rival Best Buy Co. Inc., which disappointed investors last week with sluggish profits, lost 78 cents to $41.46.

While Circuit City encouraged investors, consumer spending may still be a troublesome issue heading into the holiday season. The International Council of Shopping Centers said retail sales at chain stores fell 2.1 percent for the week ending Sept. 17, the largest drop-off since Dec. 6, 2003 and the fourth straight week of flat or declining sales. The ICSC blamed high gasoline prices and falling consumer confidence for the decline.

In other earnings news, Wall Street firm Goldman Sachs Group Inc. climbed 12 cents to $118.40 after reporting an 83 percent surge in third-quarter profits . Revenues jumped 61 percent on strong fixed income and commodity trading, while the brokerage house remains atop the rankings for announced merger-and-acquisition deals.

Federated Department Stores Inc. dropped 84 cents to $64.86 after the company announced it would slash 6,200 jobs following the completed acquisition of May Department Stores Co. The cuts will come in 2006.

Sluggish sales prompted U.S. Steel Corp. to lower its quarterly earnings forecasts below Wall Street’s current estimates. Higher energy costs could also eat into profits, the company said. U.S. Steel lost $2.44, or 5.4 percent, to $42.81.

Overseas, Japan’s Nikkei stock average rose 1.47 percent. In Europe, Britain’s FTSE 100 closed down 0.24 percent, France’s CAC-40 climbed 0.58 percent for the session and Germany’s DAX index gained 0.75 percent.

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

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