Investors still wary of rate increases
NEW YORK » The Federal Reserve's long-awaited pause in interest rate hikes sent stocks modestly lower yesterday as Wall Street welcomed the move but worried that more increases might still be ahead.
The Fed had implemented 17 quarter-percentage point rate hikes since June 2004, raising the nation's benchmark rate from 1 percent to 5.25 percent, where it stood after yesterday's meeting.
The Fed said economic growth was slowing, but that some inflation risks remain, meaning Fed officials could resume raising rates at future meetings, the next one coming in September. However, with many on Wall Street concerned that the Fed could raise rates too far, possibly pushing the economy into a recession, the pause was welcomed even as uncertainty about future rate hikes weighed on stocks.
"We had been anticipating this pause for weeks now, and the accepted wisdom was that whatever they did was going to be anticlimactic for the market," said John Wilson, managing director of equity capital markets at Morgan Keegan. "This may be a little bit of selling on the news, sure, but I couldn't have asked for a better outcome from the Fed."
The Dow Jones industrial average fell 45.79, or 0.41 percent, to 11,173.59 after fluctuating shortly after the Fed's announcement.
Broader stock indicators also fell. The Standard & Poor's 500 index lost 4.29, or 0.34 percent, to 1,271.48, and the Nasdaq composite index dropped 11.65, or 0.56 percent, to 2,060.85.
Oil prices traded lower as Energy Secretary Samuel Bodman sought to assure the market that Sunday's shutdown of the Prudhoe Bay oilfield in Alaska would not cause undue shortages. A barrel of light crude settled at $76.31, down 67 cents, on the New York Mercantile Exchange.
Energy costs are one of the lingering inflation pressures in the market that worry the Fed, and investors saw another warning sign early yesterday after the Labor Department said worker productivity increased by just 1.1 percent in the second quarter, down from 4.3 percent in the first three months of the year. In addition, unit labor costs jumped 4.2 percent, the biggest increase since 2004. Economists believe slower productivity and higher costs could lead businesses to pass costs on to the consumer as higher prices, thus triggering inflation.
In its policy statement, the Fed left open the possibility of more rate hikes, depending on whether future economic data shows more signs of increasing inflation risk. Most analysts, however, took the statement as a sign that the Fed would continue holding steady.