Investors haunted by specter of stagflation

By Madlen Read
Associated Press

NEW YORK » Wall Street extended last week's losses yesterday as investors remained concerned about flagging growth and rising prices, and were skeptical that a special Federal Reserve credit auction will be a solution.

The Fed offered $20 billion in 28-day credit through an auction yesterday, intended to encourage commercial banks to borrow from the Fed. That, in turn, is designed to boost banks' lending to businesses and consumers and keep the economy humming.

A speech last night by former Fed Chairman Alan Greenspan added to the market's ill humor. Greenspan said "stagflation" -- when inflation accelerates and the economy weakens -- is a growing possibility, given last week's data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, might feel less inclined to lower rates again.

Higher inflation is also a problem for consumers, especially during the holiday season. With only a week left until Christmas, sales data has suggested tepid spending by Americans, who are struggling with higher food and energy costs and tumbling home values.

"The consumer is two-thirds of our economy. The consumer holds the key to whether we have a recession in 2008," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc. in St. Louis.

The Dow fell 172.65, or 1.29 percent, to 13,167.20, finishing at its low of the session.

Broader stock indicators also declined. The Standard & Poor's 500 index dropped 22.05, or 1.50 percent, to 1,445.90, and the Nasdaq composite index fell 61.28, or 2.32 percent, to 2,574.46.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.44 billion shares compared with 1.12 billion shares traded Friday.

Peter Cardillo, chief market economist at Avalon Partners Inc., said the market is volatile ahead of Friday's "quadruple witching," a quarterly occurrence during which contracts expire for stock index futures, stock index options, stock options and single stock futures.

Government bond prices rose as stocks fell. The yield on the 10-year Treasury note, which moves opposite its price, slipped to 4.19 percent from 4.24 percent late Friday.

Light, sweet crude futures fell 64 cents to settle at $90.63 a barrel on the New York Mercantile Exchange.

In economic data, the U.S. government said the current account deficit, the broadest measure of international trade, narrowed in the third quarter compared with the second quarter, as expected, to the lowest level in two years.

Diversified manufacturer Ingersoll-Rand Co. said it will buy air conditioner maker Trane Inc. for $10.1 billion. Ingersoll-Rand shares fell $5.58, or 11.4 percent, to $43.60, Trane surged $8.04, or 21.6 percent, to $45.24.

The conglomerate Loews Corp. said its board approved a spinoff of cigarette maker Lorillard Inc.

Loews rose $1.14, or 2.4 percent, to $47.94.

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