Fed rate increase
sends stocks south

NEW YORK » Investors concerned about slowing economic growth sent stocks sharply lower yesterday after the Federal Reserve said it would continue raising interest rates despite Wall Street's worries about the economic impact of Hurricane Katrina.

While some investors had hoped for a pause in rate hikes after the hurricane, the Fed -- concerned about high oil prices and their potential to spark inflation -- raised the nation's benchmark rate by a quarter percentage point to 3.75 percent. The Fed said the destruction along the Gulf Coast, while hampering economic activity short-term and pressuring the stock market, did not pose "a more persistent threat" to the overall economy.

Instead, the Fed said it would stick to its policy of gradual, measured rate hikes. While that may keep inflation in check, the move would make it more expensive for individuals and companies to borrow money -- something that investors feared could hinder economic expansion.

"I would read it as a very hawkish statement under the circumstances, barely paying lip service to the potential threat to the economy from Katrina," said Chris Piros, director of investment strategy for Prudential's Strategic Investment Research Group. "They're saying they have an obligation to maintain price stability and fight inflation, but no obligation on economic growth or anything else."

The Dow Jones industrial average fell 76.11, or 0.72 percent, to 10,481.52. The Standard & Poor's 500 index lost 9.68, or 0.79 percent, to 1,221.34, and the Nasdaq composite index dropped 13.93, or 0.65 percent, to 2,131.33.

Declining issues outnumbered advancers by about 11 to 5 on the New York Stock Exchange, where consolidated volume came to 2.38 billion shares, compared with 2.1 billion traded yesterday.

The Russell 2000 index of smaller companies fell 6.39, or 0.96 percent, to 660.63.

Bonds held steady after the Fed decision, with the yield on the 10-year Treasury note unchanged at 4.25 percent.

Oil prices fell sharply during the session, though regained some of the losses as Hurricane Rita strengthened as it passed between Florida and Cuba on an expected path toward the Gulf of Mexico's oil production and refining centers. A barrel of light crude settled at $66.23, down $1.16, on the New York Mercantile Exchange after rising more than $4 yesterday.

The markets were mostly unfazed as the U.S. Commerce Department reported a decline in new home construction, a possible sign of a cooling housing market. Construction of new homes and apartments dropped 1.3 percent last month after a decline of 1.5 percent in July, the first back-to-back declines in housing starts in 17 months.