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Fed's words rattle Wall Street's investors

Stocks slumped Wednesday, as Wall Street concluded that a word change in the U.S. Federal Reserve’s policy statement means a rate hike is likely around the middle of this year.
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Stocks slumped Wednesday as Wall Street concluded that a word change in the Federal Reserve’s policy statement means a rate hike is likely around the middle of this year.

The Dow Jones industrial average held a modest gain for most of the session, but within minutes of the Fed's 2:15 p.m. ET announcement on interest rates blue chips were trading more than 100 points lower. From then on it was downhill for the Dow, which ended the day with a loss of 141.55 points, or 1.3 percent, at 10,468.37.

While the Fed left key short-term rates unchanged as expected, the central bank tweaked the language of its policy statement, eliminating a pledge to keep rates low "for a considerable period" that had been included in every statement since August.

“The Fed is slowly preparing investors for an increase in rates, but the important thing to remember is that there continues to be a certain amount of slack in the economy, so this is still several months away,” said Michael Sheldon, chief market strategist at Spencer Clarke LLC.

Broader stock indices also slid, with the Nasdaq Composite index, which tracks the technology sector, finishing the day down 38.67 points, or 1.8 percent, at 2,077.37, and the Standard & Poor's 500-stock index losing 15.57 points, or 1.4 percent, and closing at 1,128.48. U.S. Treasury prices fell sharply after the Fed’s announcement, sending yields higher.

Wall Street anticipates rate hike
Given December's disappointing employment report, most analysts had expected the Fed to leave its key federal funds rate — the interest rate banks pay each other for overnight loans — unchanged at 1 percent, its lowest level since 1958, at the conclusion of its two-day policy meeting Wednesday.

Analysts had also anticipated that the Fed would decide to prolong its accommodative stance on monetary policy. But instead of the "considerable period" wording, the Fed adjusted its language, saying that "with inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

The policy change appeared to hint that the Fed may raise interest rates sooner than expected but also implies the economy is recovering, which would improve the environment for corporate earnings and ultimately have positive implications for stocks.

In late June, the Fed cut rates for the 13th time in three years to help stimulate the economy and ward off deflation. Low interest rates are good for stocks and the overall economy because they help fuel corporate earnings growth by keeping borrowing costs low.

Wall Street cheered by earnings
Earlier in the session Wall Street was lifted by a batch of strong quarterly earnings reports from companies like Dow component Procter & Gamble, which reported a 22 percent rise in quarterly profit before the open. The largest U.S. consumer products firm said its profit was boosted by the acquisition of the Wella hair-care business and strong sales of over-the-counter flu medications.

Altria Group, another member of the Dow industrials, helped to support stocks earlier in the day. The food and tobacco company reported higher quarterly earnings, helped by improved results at its domestic tobacco unit.

Time Warner Inc, the world's largest media company, reported a fourth-quarter profit, reversing a year-earlier loss, led by strong film and cable television results.

Shares of Broadcom rose 3 percent on the Nasdaq stock market. The maker of communications-related microchips reported its first quarterly profit in over three years after Tuesday’s close and said business remained strong in the current quarter.

Electronics manufacturer Flextronics International reported a third-quarter net profit late Tuesday compared with a year-earlier net loss, as sales topped optimistic analysts' forecasts. And shares of video game publisher Electronic Arts were hit by disappointment over its earnings outlook.

The strong earnings were offset by unappetizing economic data. Shortly after the market opened the government said sales of new U.S. homes fell unexpectedly in December as the strongest home-selling year on record ended with a whimper.

Separately the Commerce Department said new orders for long-lasting U.S. goods were unchanged in December, a weaker-than-expected reading that raised questions about the strength of the manufacturing recovery.

Economists believe a sustained pickup in business spending is crucial for a long-lasting economic recovery.

Overseas, Europe’s major stock market averages rose modestly, but Japan’s benchmark Nikkei stock average closed down 0.7 percent, losing ground for a third straight session as technology shares fell.

Reuters and the Associated Press contributed to this story