Investors cash out
on inflation fears

NEW YORK » Investors pulled their cash out of the stock market yesterday, leaving prices sharply lower after the Federal Reserve confirmed Wall Street's fears that inflation poses an increasing threat to the economy.

As expected, the Fed's Open Market Committee raised the nation's short-term benchmark interest rate by a quarter percentage point to 2.75 percent. But in its policy statement, the Fed noted that "pressures on inflation have picked up in recent months," which analysts said was a sign that inflation could be a growing problem for the economy.

"The Fed conceded that there's a bit more inflation in the near term than people were expecting to hear about," said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. "And if you get short-term inflation, there's the danger of it extending into the long term, and that means higher interest rates and lower multiples for equities."

The Fed, however, kept its "measured pace" language, which Wall Street has taken to mean steady quarter percentage point rate hikes in the future. A faster, more aggressive pace of rate hikes would make it difficult for companies to borrow the money needed to grow, and could stifle the overall economy.

The Dow Jones industrial average fell 94.88, or 0.9 percent, to 10,470.51, its lowest close since Jan. 28.

Broader stock indicators also fell sharply. The Standard & Poor's 500 index was down 12.07, or 1.02 percent, at 1,171.71, also its worst close since Jan. 28. The Nasdaq composite index lost 18.17, or 0.91 percent, to 1,989.34, falling to its lowest closing level since Nov. 2.

Oil prices fell substantially in what traders said was profit-taking ahead of Wednesday's inventory report from the U.S. Energy Department. A barrel of light crude for May delivery settled at $56.03, down $1.43, on the New York Mercantile Exchange.

Bonds also sold off sharply after the Fed's announcement, with the yield on the 10-year Treasury note rising to 4.62 percent, the highest yield since late July. The dollar was mixed but gaining against most major currencies, while gold prices slid to one-month lows.

Before the Fed decision, the Labor Department's Producer Price Index, a key inflation measure, gave Wall Street an early dose of enthusiasm. Wholesale prices climbed 0.4 percent, largely due to high energy prices. With volatile food and energy prices removed, "core" PPI rose just 0.1 percent, in line with economists expectations.