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Wall Street gets rate-hike indigestion
Stocks stumble after Fed raises rates, hints at more increases to come; Treasuries struggle.
September 20, 2005: 6:17 PM EDT
By Alexandra Twin, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Stocks slipped Tuesday over disappointment that the Federal Reserve's 15-month rate-hike campaign shows no signs of slowing down.

As of 6 p.m. ET, Nasdaq and S&P futures pointed to a flat open Wednesday when fair value is taken into account.

The Standard & Poor's 500 (down 9.68 to 1,221.34, Charts) index lost 0.8 percent.

The Dow Jones industrial average (down 76.11 to 10,481.52, Charts) and the Nasdaq composite (down 13.93 to 2,131.33, Charts) both posted slightly smaller declines.

The central bank voted Tuesday to boost the Fed funds rate, an overnight bank lending rate, by a quarter-percentage point to 3.75 percent. It was the 11th hike in a row.

The move was in line with most estimates.

However, there had been some speculation that the Fed might opt to pause in the wake of Hurricane Katrina, or at least hint in the statement that there might be a pause at the next meeting due to Katrina's impact. One of the Fed governors voted against the hike, presumably for this reason.

However, "most people probably expected them to tighten," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. "The policy statement was the source of differing opinions."

In the closely watched statement, the bankers acknowledged the short-term economic impact of the hurricane but noted that concerns about rising energy prices and other inflationary worries necessitated the rate hike.

Regarding the impact of Katrina, the bankers wrote that "while these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat." (To read the statement, click here.)

The Fed again pledged to raise rates at a measured rate going forward.

The stock market may have reflected disappointment that the statement offered no indication of a pause at the November meeting.

"The market is taking a heavy reaction at the moment, but the message is actually positive for stocks," said Jim Dunigan, chief investment officer at PNC Advisors. "The Fed is saying generally that we continue to have reasonable economic activity, despite the storm, and that underlying inflation can be contained."

As to what the Fed does at the next meeting, that will depend largely on anecdotal information, Shapiro said.

"We know the data between now and that meeting are going to show the negative impact of Katrina," he added, "but the Fed has made it clear that they are looking beyond that period."

OPEC will release an additional two million barrels of oil a day for three months beginning October 1, the oil cartel said late Tuesday. The move was made in an attempt to ease some worries about higher energy prices, although the cartel and some energy market watchers say the problem is more about refining capacity than supply.

Wednesday brings the weekly oil inventory report and earnings news from Morgan Stanley.

What moved?

Declines were broad-based, with 26 out of 30 Dow issues falling.

The biggest decliners were DuPont (down $0.85 to $39.45, Research), Hewlett-Packard (down $0.60 to $28.28, Research), McDonald's (down $0.88 to $32.62, Research), Honeywell (down $0.74 to $37.56, Research) and the two Dow retailers, Home Depot (down $0.60 to $28.28, Research) and Wal-Mart Stores (down $0.80 to $43.21, Research).

A variety of homebuilders suffered some profit taking after several up sessions. The declines were fostered in part by the morning's weaker-than-expected read on housing starts.

The Dow Jones Home Construction (down $46.37 to $921.00, Research) index fell 4.8 percent.

Oil stocks fell along with the commodity, lowering the Amex Oil (down 11.94 to 1,067.61, Charts) Index by 1.1 percent.

Retailers were hit hard by a combination of the Fed announcement and a profit warning from American Eagle Outfitters (down $3.00 to $21.89, Research).

The teen retailer warned that current-quarter sales won't meet forecasts, due to lackluster September sales. Shares plunged more than 12 percent.

The S&P Retail (Charts) index fell 1.8 percent.

Mattress maker Tempur-Pedic International (down $4.68 to $11.70, Research) slumped nearly 29 percent and was the New York Stock Exchange's most-actively traded issue after warning that 2005 sales and earnings would miss forecasts.

On the upside, Apple Computer (up $0.55 to $53.19, Research) rose after CEO Steve Jobs pledged to resist the recording industry's demands to raise the price of songs downloaded on iTunes.

Circuit City (up $0.92 to $16.43, Research) climbed nearly six percent after reporting improved quarterly earnings that topped forecasts.

StemCells (up $0.61 to $5.54, Research) rallied 12 percent in active Nasdaq trade following the release of a study late Monday that showed stem cells used to treat damaged spinal cords in mice improved mobility.

Market breadth was negative. On the New York Stock Exchange, losers beat winners 11 to 5 on volume of 1.72 billion shares. On the Nasdaq, decliners beat advancers three to two on volume of 1.88 billion shares.

Treasury prices seesawed, only to end little changed, leaving the yield on the 10-year note at about 4.25 percent.

The dollar rose modestly versus the euro and the yen.

U.S. light crude oil for October delivery sank $1.16 to settle at $66.23 a barrel on the New York Mercantile Exchange after surging 7 percent Monday on worries about Tropical Storm Rita, which was upgraded to a hurricane Tuesday.

COMEX gold retreated 40 cents to settle at $470 an ounce, after rallying Monday as a safe-haven play for wary investors.  Top of page

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