Stocks fall after Fed signals higher rates
NEW YORK » Stocks tumbled yesterday, with the Dow Jones industrials dropping 95 points after the Federal Reserve disappointed investors by suggesting that more interest rate hikes were on the way.
The Fed raised the nation's benchmark interest rate yesterday as expected, but the surprise for the markets came in an accompanying statement in which the Fed upgraded its view on the economy, suggesting that at least one and possibly even two more rate increases were in the cards.
That sent stock prices sharply lower, despite a strong reading on consumer confidence earlier yesterday that had provided support to the market.
The Dow Jones industrial average closed down 95.57, or 0.85 percent, at 11,154.54.
Broader stock indicators also fell sharply. The Standard & Poor's 500 index fell 8.38, or 0.64 percent, to 1,293.23 and the Nasdaq composite index skidded 11.12, or 0.48 percent, to 2,304.46.
The Russell 2000 index of smaller companies fell 2.76, or 0.37 percent, to 751.27.
Declining issues outnumbered advancing ones 2 to 1 on the New York Stock Exchange. Preliminary consolidated volume was 2.21 billion shares, up from 2.04 billion at the same time Monday.
Bond prices also slid in response to the Fed's announcement. The yield on the 10-year Treasury note, which rises when the price of the note falls, jumped to 4.78 percent from 4.71 percent late Monday.
The latest fed funds rate increase, the 15th consecutive rise of a quarter percentage point, leaves the rate at 4.75 percent, its highest level since April 2001.
The Fed said in its statement that "some further policy firming may be needed," indicating that it was inclined to keep raising rates in an effort to contain inflationary pressures.
The Fed's two-day meeting was the first led by new chairman Ben Bernanke.
The Fed has been raising rates steadily since June 2004 under a program begun by Bernanke's predecessor, Alan Greenspan. Since that time, the benchmark federal funds rate, the interest that banks charge each other for overnight loans, has risen from a low of 1 percent.
Now that a federal funds rate of 5 percent is a given with at least one more rate increase likely, investors are now wondering how likely a further increase to 5.25 percent will be.
Oil futures rose following the threat of a strike in Norway. Light sweet crude for May delivery rose $1.91 to settle at $66.07 a barrel on the New York Mercantile Exchange
Overseas, Japan's Nikkei stock average rose 0.2 percent. Britain's FTSE 100 fell 0.6 percent, Germany's DAX index was down 0.4 percent, and France's CAC-40 was down 0.2 percent.