Wall Street wilts after Fed

Stocks slump, giving up gains as investors take a 'sell the news' reaction to central bank's rate cut, statement that hints no more rate cuts for the time being.

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By Alexandra Twin, CNNMoney.com senior writer

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In six months, I believe the economy will...
  • Be in better shape
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  • Won’t change one bit

NEW YORK (CNNMoney.com) -- Stocks ended lower Wednesday, erasing earlier gains, as investors took a 'sell the news' reaction after the Federal Reserve cut a key short-term interest rate, as expected, and signaled it may not cut rates again anytime soon.

The Dow Jones industrial average (INDU) lost a few points. The broader Standard & Poor's 500 (SPX) index lost 0.4% and the Nasdaq composite (COMP) lost 0.6%.

Stocks rallied ahead of the afternoon Fed announcement and in the first 30 minutes after the announcement. But the advance disappeared by the close, with investors stepping back at the end of an upbeat April, the first up month on Wall Street since since October.

The Federal Reserve cut the fed funds rate, a key overnight bank lending rate, by a quarter-percentage point to 2%, as expected. In its closely-watched statement, the central bank indicated that the economic outlook is not as dour as it has been recently and that its rate-cutting campaign could soon take a breather.

The announcement fulfilled expectations that some inflationary concerns are creeping in, said Steven Goldman, market strategist at Weeden & Co. But It also indicated that the bankers think the economy is starting to or will soon start to respond favorably to the series of cuts already in place, he said. As a result, "this may be the last cut for the foreseeable future,' he said.

The recent rally in stocks over the last month suggests that the equity market is looking ahead and anticipating a better environment. "Hopefully, upcoming economic news will reflect that optimism," Goldman said.

Bond prices rallied after the announcement and oil and gold prices slumped. The dollar initially weakened following the announcement, but had stabilized by the early evening.

A pause in interest rates will be significant for the dollar and for the inflation outlook going forward, said William Rutherford, president at Rutherford Investment Management.

"Their action will help to curb inflation because it will strengthen the dollar and knock some of the air out of commodity prices," he said.

Earlier, stocks had rallied as investors reacted to readings on first-quarter GDP growth, April private sector employment and earnings from Dow components General Motors and Procter & Gamble.

Exxon Mobil, also a Dow company, reports earnings Thursday morning. Thursday also brings the March personal income and spending report, March reads on construction spending and manufacturing and the weekly jobless claims report.

GDP: Gross domestic product grew at an 0.6% annual rate in the first quarter, as it did in the final quarter of 2007. That was slightly better than the 0.5% rate expected by economists, yet confirmed that the economy remains in a period of sluggish growth. (Full Story).

Another better sign for the economy came from payroll services firm ADP, which reported a surprise rise in private sector employment in April. Employment rose 10,000 versus forecasts for a decline of 60,000. That could be a positive indication ahead of Friday's more closely-watched government jobs report.

In other economic news, the Chicago PMI, a regional manufacturing report, dipped to 48.3 in April from 48.2 in March, topping forecasts for a slide to 47.5. Any reading below 50 implies weakness in the sector.

GM and other corporate news: Automaker General Motors (GM, Fortune 500) reported a steeper quarterly loss that was nevertheless narrower than what analysts were expecting, and weaker sales that beat forecasts. Shares jumped 9.4%.

Procter & Gamble (PG, Fortune 500) reported higher quarterly earnings that topped estimates and boosted its full-year forecast, sending shares 1.8% higher.

Citigroup (C, Fortune 500) said it was boosting the size of its previously announced common stock offering to $4.5 billion from $3 billion. Citi shares fell 4%.

Commodities: Oil and gold prices dipped, while gas prices hit new highs.

U.S. light crude oil for June delivery fell $2.17 to settle at $113.46 a barrel on the New York Mercantile Exchange after the government reported a bigger-than-expected jump in weekly crude supplies.

Meanwhile, the national average price for a gallon of regular unleaded gas hit an all-time record of $3.617, AAA reported. (Full story)

COMEX gold for June delivery fell $11.70 to settle at $865.10 an ounce.

Other markets. The dollar fell versus the euro and yen, giving up earlier gains.

Treasury prices gained, lowering the yield on the benchmark 10-year note to 3.73% from 3.82% late Tuesday. Bond prices and yields move in opposite directions. To top of page

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