Stocks fall sharply on Fed remarks
Stocks tumbled Tuesday, with the Dow Jones industrials dropping 95 points after the Federal Reserve disappointed investors by suggesting that more interest rate hikes were on the way.
The Fed raised the nation’s benchmark interest rate Tuesday as expected, but the surprise for the markets came in an accompanying statement in which the Fed upgraded its view on the economy, suggesting that at least one and possibly even two more rate increases were in the cards.
That sent stock prices sharply lower, despite a strong reading on consumer confidence earlier Tuesday that had provided support to the market.
The Dow Jones industrial average closed down 95.57, or 0.85 percent, at 11,154.54.
Broader stock indicators also fell sharply. The Standard & Poor’s 500 index fell 8.38, or 0.64 percent, to 1,293.23 and the Nasdaq composite index skidded 11.12, or 0.48 percent, to 2,304.46.
Bond prices also slid in response to the Fed’s announcement. The yield on the 10-year Treasury note, which rises when the price of the note falls, jumped to 4.78 percent from 4.71 percent late Monday.
The latest fed funds rate increase, the 15th consecutive rise of a quarter percentage point, leaves the rate at 4.75 percent, its highest level since April 2001.
The Fed said in its statement that “some further policy firming may be needed,” indicating that it was inclined to keep raising rates in an effort to contain inflationary pressures.
The Fed’s two-day meeting was the first led by new chairman Ben Bernanke.
Craig Coats, co-head of fixed income trading at the brokerage Keefe, Bruyette & Woods, said investors had hoped to see signs that the Fed might have just one more rate increase to go in its current cycle. But with the Fed upgrading its assessment of the economy’s strength Tuesday, Coats said one and possibly two additional more hikes were now likely.
“This was a little bit more than most people were looking for,” Coats said. “The market is going to have to price this in over the next couple of weeks.”
The Russell 2000 index of smaller companies fell 2.76, or 0.37 percent, to 751.27.
Declining issues outnumbered advancing ones 2 to 1 on the New York Stock Exchange. Preliminary consolidated volume was 2.21 billion shares, up from 2.04 billion at the same time Monday.
Overseas, Japan’s Nikkei stock average rose 0.2 percent. Britain’s FTSE 100 fell 0.6 percent, Germany’s DAX index was down 0.4 percent, and France’s CAC-40 was down 0.2 percent.