Stocks drop with investors confused over Fed’s rate cut
NEW YORK » Wall Street gave up sharp gains and closed lower yesterday after the Federal Reserve cut interest rates by a quarter point but left investors guessing about the central bank's next move. The Dow Jones industrial average, momentarily soaring above 13,000 for the first time since early January, ended the session with a modest loss.
The Fed's statement yesterday made it clear the central bank is less worried about economic growth than in March, when it pointed to "downside risks to growth." The Fed said yesterday that while the economy remains weak and the inflation outlook is still uncertain, its rate cuts and lending efforts over the past several months "should help promote moderate growth over time and to mitigate risks to economic activity."
But what was less certain was whether the central bank is confident enough about the economy to make inflation a top priority and keep interest rates on hold.
"It feels as if they're going to pause," said Kim Caughey, equity research analyst at Fort Pitt Capital Group. She said, though, that she was surprised the Fed stated that it "expects inflation to moderate in the coming quarters."
"I think they're being clear that they're not 100 percent sure about what the next step is," Caughey said.
With economic data in recent weeks coming in anemic but not as bad as expected, inflation has appeared to Wall Street to be the growing threat, due to rising food prices, crude oil near $120 a barrel and U.S. roadside gasoline prices surging above $3.60 a gallon.
"The market had wanted to hear tougher talk on inflation, and some sort of talk that the easing has been adequate for a while, for the foreseeable future," said Scott Wren, equity strategist for Wachovia Securities.
The Dow Jones industrial average fell 11.81, or 0.09 percent, to 12,820.13, after trading up 178 points shortly after the Fed's announcement.
Broader stock indicators also closed down, having given up steep gains. The Standard & Poor's 500 index fell 5.35, or 0.38 percent, to 1,385.59, and the Nasdaq composite index fell 13.30, or 0.55 percent, to 2,412.80. The Russell 2000 index of smaller companies fell 2.75, or 0.38 percent, to 716.18.
Advancing issues outnumbered decliners by about 8 to 7 on the New York Stock Exchange. Consolidated volume totaled 3.66 billion shares, the same as on Tuesday.
The benchmark 10-year Treasury note rose after the Fed's decision. Its yield, which moves opposite its price, fell to 3.73 percent from 3.82 percent late Tuesday.
The dollar dropped against most other major currencies, while gold prices turned higher.
Crude oil for June delivery fell $2.17 to settle at $113.46 a barrel on the New York Mercantile Exchange, after falling more than $3 a barrel on Tuesday.
The Commerce Department estimated yesterday that the gross domestic product rose at a modest seasonally adjusted annual rate of 0.6 percent during the first quarter. However, many economists had forecast a lower rise in first-quarter GDP -- some had even predicted a contraction.
Another report that beat lowered expectations came from General Motors Corp., whose quarterly loss of $3.3 billion due to supplier strike and weak U.S. sales was milder than Wall Street predicted. Shares of the Dow component jumped $2, or 9.4 percent, to $23.20.