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Fed holds rates,
signals future cuts

Discouraged investors, who
were hoping for a reduction,
send the Dow falling 61 and
the Nasdaq reeling 113

---

Associated Press

WASHINGTON -- The Federal Reserve, faced with a rapidly slowing economy, decided today to leave a key interest rate unchanged and signaled that it stood ready to cut interest rates if necessary to keep the country out of a recession.

The central bank's decision came after a closed-door meeting of the Federal Open Market Committee. The panel's officials, who include Fed Chairman Alan Greenspan, set interest rate policy.

On Wall Street, stocks plunged following the Fed's announcement.

The Dow Jones industrial average fell 61.05 to 10,584.37 after gaining as much as 139 points earlier in the session and the Nasdaq composite index tumbled 112.81, or 4.3 percent, to 2,511.71 -- its lowest level in more than a year. The Standard & Poor's 500 index lost 17.14 to 1,305.60.

Given the decision to leave rates unchanged, a key short-term interest rate controlled by the Fed, called the federal funds rate, will stay at a nine-year high of 6.5 percent. The funds rate is the interest banks charge each other on overnight loans.

For the first time in two years, the Fed changed its policy directive, intended to signal future rate moves, to state that it no longer sees inflation as the primary threat facing the economy.

Instead, the Fed said that economic weakness is now the greatest threat facing the United States.

"While some inflation risks persist, they are diminished by the more moderate pace of economic activity," the Fed said in its statement.

In a selloff ignited by intensifiying fears of weak corporate profits and possible economic recession, investors reversed course from their earlier buying spree driven by speculation the Fed would cut rates. Tech and blue chip stocks tumbled as the market's focus returned to earnings and the economy.

"The stock market right now is jumping around based on worries about the economy and earnings," said Robert Christian, chief investment officer at Wilmington Securities. "I think we're in for a choppy period that's going to extend into next year."

Advancers narrowly outnumbered decliners 13 to 10 on the New York Stock Exchange, with 1,465 up, 1,434 down and 450 unchanged. Volume was 1.31 billion shares vs. 1.16 billion yesterday.

The NYSE composite index lost 3.37 to 639.86, the American Stock Exchange composite index rose 6.44 to 881.44 and the Russell 2000 index fell 4.47 to 458.78.

The Treasury's 10-year note fell 5/32 to 104 6/32; its yield rose to 2 basis points to 5.19 percent. The two-year note fell 1/32 to 100 1/2; its yield rose 3 basis points to 5.34 percent. The 30-year bond fell 15/32 to 111 10/32; its yield rose 3 basis points to 5.47 percent.

"Treasury yields are priced for recession right now, and recession is not that certain" so even some encouragement that a rate cut is near didn't help bonds, said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.

Trading was heavy and extremely volatile after the Fed announcement, which cut short a morning rally in technology and what would have been the second straight session of blue-chip gains. "Financial stocks and Microsoft did not do well and Wal-Mart's down," said Arthur Hogan, chief market analyst at Jefferies & Co.

"But the biggest disappointment on the Dow is SBC, which warned of lower growth."

SBC fell $6.75 to $46.56. Wal-Mart was off $3.44 at $28.25. Target Corp. fell $3.44 to $28.25, a 10 percent drop. Morgan Stanley Dean Witter dropped 25 cents to $69 after rallying early in the day despite reporting earnings well below Wall Street estimates.

Microsoft was off $3.06 at $44.75 on reports the company plans to cut costs as it boost some salaries. Sun Microsystems dropped $1.63, or 5.7 percent, to $26.94.

Gary Kaltbaum, a technical analyst with JW Genesis, said the market's problems, particularly with regard to earnings, are especially acute in the high-tech sector.

"I'd say we're going to keep probing lows on the Nasdaq and working off valuations," Kaltbaum said.

Todd Clark, head of listed trading at WR Hambrecht, said the market's negative reaction reflected disappointment by many on Wall Street who had been banking on an interest rate cut. The market views lower rates as necessary to stimulate the slowing economy and jump-start slumping corporate profits.

"The market got a little ahead of itself in expecting an interest rate cut right away," Clark said.

"We didn't get the cut but . . . to go from saying there is a risk of inflation to a risk of recession is as aggressive as the Fed's going to get."