Fed statement ends investor celebration

NEW YORK » Wall Street ended an uneasy session mostly lower and bond prices tumbled yesterday after the Federal Reserve suggested it might not be through raising interest rates if they're needed to fight inflation caused by soaring energy and commodities prices.

The Fed's decision to boost a key short-term lending rate to 5 percent was widely anticipated. But investors were rattled by the central bank's accompanying statement, which said more policy firming -- or rate hikes -- could be necessary to contain inflation. The Fed indicated it would be closely watching economic data to determine its next step.

Investors had grown hopeful that recent signs of a cooling economy would prompt the Fed to stop lifting rates. However, the prospect of more increases dampened the market's celebration and stocks briefly fell.

Ken McCarthy, chief economist forvFinance Investments, said the Fed will likely not raise interest rates at its June meeting to give it more time to assess the economy, adding that the central bank's stance is ultimately positive for equities in the long term.

"The Fed realizes that the tightening they've already done hasn't had its full impact," McCarthy said.

"The numbers we're getting now reflect the funds rate at 4 percent. The Fed wants to see the effect of 4.5 percent or 5 percent, and we won't see that until later this year."

At the close, the Dow rose 2.88 to 11,642.65. The Dow is less than 80 points from its best-ever close of 11,722.98, reached Jan. 14, 2000.

Broader stock indicators declined. The Standard & Poor's 500 index lost 2.29 to 1,322.85, and the Nasdaq composite index sank 17.51, or 0.75 percent, to 2,320.74.

The chance for more interest rate increases weighed on the dollar, which fell against the Japanese yen. Gold prices climbed past a 25-year high of $700 an ounce.

Yesterday's increase lifted the federal funds rate to 5 percent, the Fed's 16th consecutive quarter percentage point raise since June 2004. The central bank began boosting rates from historic lows in an effort to stifle an overheating economy and keep inflation in check.

Upcoming reports on wholesale and consumer prices, factory utilization and job growth could cause severe volatility in the coming weeks as Wall Street resumes its habit of trying to predict the Fed's next interest rate move.

"If the economy doesn't slow as expected, or inflation becomes a bigger problem for financial markets, the Fed has stated that it won't hesitate to start raising rates again," said Michael Sheldon, chief market strategist at Spencer Clarke LLC.