Stock market hurt by Fed move

by

Published: February 19,2010

Tags: banking and finance, investing, stocks and bonds

NEW YORK — Stocks retreated in morning trading Friday after the Federal Reserve said it raised the interest rate it charges banks for emergency loans.

The Fed said its action should not be seen as a sign that it will soon raise rates for consumers and businesses. But the stock market, which tends to trade on expectations for what the economy will be like in six to nine months, seems to be anticipating that rates will eventually rise.

The rate hike offset relief over a tame inflation report. The Labor Department said the Consumer Price Index rose by a smaller-than-expected 0.2 percent in January. Excluding food and energy, the index actually slipped 0.1 percent, its first monthly drop in 27 years.

In morning trading, the Dow Jones industrial average is down 25.84, or 0.3 percent, at 10,367.06. The Standard & Poor’s 500 index is down 3.52, or 0.3 percent, at 1,103.23, while the Nasdaq composite index is down 7.69, or 0.3 percent, at 2,234.02.

About five stocks fell for every four that rose on the New York Stock Exchange, where volume came to 237.5 million shares, compared with 69.2 million traded at the same point Thursday.

The tame CPI report comes as a relief to investors because it makes it less likely the Fed will need to raise its benchmark fed funds rate almost immediately to try to tame inflation. A report Thursday on inflation at the wholesale level showed a larger-than-expected rise, which added to the scrutiny of the consumer price report.

Inflation would force the Fed’s hand to raise rates so it could combat inflation. However, the Fed has repeatedly said inflation isn’t a problem. That has allowed it to keep rates for consumers and businesses at historic lows in an effort to jump-start the economy.

Raising rates too early could upend a recovery and make it more difficult for jobs creation — a key stumbling block to a strong rebound.

Investors focus has squarely returned to the domestic economy in recent days after weeks of concern about overseas economies sent stocks lower. Stocks mostly fell over the past month because of worries over debt problems in Greece and other European nations as well as China’s move to curb growth and prevent speculative bubbles.

Meanwhile, bond prices rose modestly. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.80 percent from 3.81 percent late Thursday.

The dollar rose against other major currencies. Gold prices fell, while oil rose.

The Russell 2000 index of smaller companies rose 0.65, or 0.1 percent, to 629.97.

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