Interest Fears Fuel Dow Decline
A former Federal Reserve governor’s expectation that the central bank will raise short-term interest rates sent a jittery stock market down sharply Friday - its third drop in four sessions.
The Dow Jones industrial average slid 50.23 points to 5,643.18.
Blue chips floundered at the open, picked up a little but then dove in late morning with bond prices, on reports that former Federal Reserve Governor Lyle Gramley expects a half percentage point increase in the federal funds rate when the Fed meets the first week of July.
The New York Stock Exchange twice imposed trading collars to try to lessen the volatility.
Gramley’s comments, which came after similar remarks from Fed insiders earlier this week, said recent strong housing data might prompt the Fed to conclude the economy was growing at an inflationary pace.
On Thursday, the Commerce Department said new-home sales shot up 6.7 percent in April. Further, sales and inventory trends within a gross domestic product report Thursday raised concerns that the economy is inflationary.
If central bankers sense inflation, they are likely to nudge interest rates higher to cool the economy. Stock investors don’t like higher rates because they raise corporate borrowing costs, erode earnings and make fixed-income investments more attractive relative to equities.
“If there’s one constant in this market, it’s the relationship of (interest) rates to stocks,” said Larry Wachtel, a market analyst at Prudential Securities. “If the economy is too vigorous, it means the Fed’s in your face, and when the Fed is unfriendly, stocks fall.”
The 30-year Treasury bond dropped 1 point directly after Gramley’s comments hit news wires. It was up off its bottom by midday, and was trading down 3/4 point late in the day at 6.99 percent.
Other Fed officials moved to counter Gramley’s statement, but a flurry of economic data Friday morning lent little clarity to the picture. The Commerce Department said personal income rose a seasonally adjusted 0.5 percent in April, outpacing a 0.1 percent growth in personal consumption expenditures. Wages and salaries rose 0.5 percent, which analysts said could be troublesome if it continues to rise.
The Chicago Association of Purchasing Management said its adjusted May index of area purchasing activity rose to 53.0 percent from 52.0 percent in April.
But seeing the long bond touch 7 percent was “definitely not good news for stocks,” said Arthur Hogan, the lead stock trader at Dean Witter Reynolds.
Declining issues led advancers by a narrow 6-to-5 margin on the New York Stock Exchange.Broad-market indexes were mostly lower, except the Nasdaq composite, which rose 8.38 to 1,241.86 on strength in semiconductor issues.
The NYSE’s composite index fell 1.41 to 358.83, and the Standard & Poor’s 500-stock index fell 2.58 to 669.12. The American Stock Exchange’s market value index rose 1.52 to 610.93.