Inflation Jitters Spark Deep Sell-Off

The Dow Jones industrial average gave back nearly 140 points on Wednesday as the Federal Reserve provided some abrupt reminders that rising inflation and interest rates are still a threat.

The Dow, which had surged nearly 500 points over the past seven sessions, fell 139.67 to 7,085.65 as investors scrambled to secure some of their recent gains in the market’s dramatic turnaround.

Broader stock indicators also retreated, weighed down by another weak day in the bond market, where long-term interest rates continued to creep back toward worrisome levels.

The technology-laden Nasdaq market bucked the trend for much of the day, but turned lower in the afternoon as the profit-taking intensified.

“We had a three-week sabbatical (from interest rate and inflation worries), and now we’re going to take some of the hot air out of the balloon,” said Don Hays, director of investment strategy at Wheat First Butcher Singer of Richmond, Va.

The bond market, which has been struggling this week to absorb a flood of new Treasury securities from the government’s quarterly refinancing, pulled back amid the latest signals from the Federal Reserve that while inflation has been mild, pricing pressures remain a worry.

Declining issues outnumbered advancers by nearly a 2-to-1 margin on the New York Stock Exchange, where volume totaled 497.58 million shares as of 4 p.m., down sharply from Tuesday’s hectic pace.

Some of the stocks that moved substantially or traded heavily Wednesday:

NYSE

Lehman Brothers Holdings, up 3-7/8 at 38.

J.P. Morgan, down 3-1/2 at 101-3/8.

Lehman shares jumped amid rumors of a takeover, possibly by J.P. Morgan, according to traders, the Dow Jones News Service reported.

Fluor, down 8-1/8 at 48.

The engineering and mining concern expects to report a second-quarter loss of about $70 million, including a $20 million charge for a cost reduction program at its Fluor Daniel unit.

NASDAQ

Discreet Logic, up 2-7/8 at 13-1/2.

The Montreal-based maker of special effects software reported a $3 million first-quarter profit that exceeded forecasts by a wide margin.

AMEX

Viacom class B, up 7/16 at 28-15/16.

The media company posted a first-quarter loss of $18.7 million on weaker results in three of its four main business units, but the loss was smaller than some analysts had expected.