Stocks Slide on Fed Forecast, Oil Prices

Updated from 4:23 p.m. EDT

Stocks in the U.S. were slammed Wednesday as some sobering predictions by the Federal Reserve and record crude oil prices sent bulls packing.

The Dow Jones Industrial Average plunged 227.49 points, or 1.77%, to 12,601.19, as every single one of its components closed in the red. The S&P 500 was down 22.69 points, or 1.61%, at 1390.71, and the Nasdaq Composite was off 43.99 points, or 1.77%, to 2448.27.

Soaring oil and disappointing corporate news already had been weighing on equity measurers, but the declines steepened after the Fed revealed it had negatively revised a number of its 2008 forecasts in the minutes from its April 30 meeting, when the fed-funds target rate was cut by another quarter-point.

"There's been a fair amount of good news lately, and the Fed is kind of acting as a wet noodle," said Doug Roberts, chief investment strategist with ChannelCapitalResearch.com. "They're indicating that, both on the inflation front and on the economic front, it's going to be a prolonged malaise. It's one thing if you have a bad storm and then it clears up, but you're told it's going to rain for 40 days and 40 nights in the summer, you're going to get depressed."

Among the revisions, the Fed bumped up its fourth-quarter unemployment-rate forecast to between 5.5% and 5.7%, compared with the prior range of 5.2% to 5.3%. The central bank also raised its full-year core inflation estimate to between 2.2% and 2.4% while slashing its 2008 prediction for real gross domestic product growth to between 0.3% to 1.2% -- down sharply from 1.3% to 2% previously.

Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman and contributor to RealMoney.com, a sister site to TheStreet.com, wrote that the revision of GDP expectations "seems exceptionally pessimistic and perhaps an over-correction. Their negativity seems to be based on view of more and marked deterioration in the labor market which will restrain spending."

The minutes also said that most members of the Federal Open Markets Committee, the policymaking arm of the Fed, viewed the decision to cut the fed funds target rate even by a scant 25 basis points as a "close call." Furthermore, most "agreed that a further, modest easing in the stance of policy was appropriate to balance better the risks to achieving the Committee's dual objectives of maximum employment and price stability over the medium run."

That seems to imply that the Fed has indeed paused its easing campaign, which has brought down its benchmark lending rate by 325 basis points since September.

Still, said Roberts, "They're not making it explicit that they won't cut rates at all. The worst that can happen is that they'll adopt a hawkish policy, and all of a sudden the market takes a downturn, the labor situation gets worse, and they look like they're behind the curve."

"They're saying that they'd like to cut rates if necessary, but not to expect it any time soon," he added.

Stocks' breadth was dismal. Declining issues outpaced advancers by a 7-to-3 margin on both the New York Stock Exchange and the Nasdaq, which saw volume reach 2.25 billion shares and 2.19 billion shares, respectively.

Keeping pressure on stocks earlier was oil's continued rampage into uncharted territory. The newly benchmarked July crude contract rocketed to a new all-time high of $133.35 a barrel on word stockpiles declined 5.4 million barrels last week, according to the Energy Information Administration. Futures settled up $4.19 at $133.17. Also, the national average for gas prices at the pump today reached another record of $3.807 a gallon.

Gold futures tacked on $8.40 to $928.60 an once. The U.S. dollar had another weak day, losing ground against both the euro and the yen. The dollar index, which measures the greenback against a basket of its major competitors, sank 0.7%.

The financial sector was also helping to drag down equity measures, with the NYSE Financial Sector Index and the KBW Bank Index plummeting 2.5% and 2.3%, respectively. The Wall Street Journal reported that some big banks, having bet against indexes that track real estate securities and leveraged loans, may have seen their hedging strategies backfire amid the market's rebound over the past few months.

The paper named Lehman Brothers (LEH) as possibly the worst hit here, and said it's likely that Morgan Stanley (MS) has also been hurt by that strategy. Shares slid 5.8% and 4.3%, respectively, as fellow brokerages Goldman Sachs (GS) and Merrill Lynch (MER) gave up 2.1% and 2.9%.

Elsewhere in the financial space, Dow components Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM) sank 2.2% or more.

Investors also appeared jarred by a Financial Times report saying that Moody's (MCO) mistakenly gave triple-A ratings to billions of dollars in debt before fixing the error in early 2007. Moody's itself was sliding 15.9%.

At the same time, American Airlines parent AMR Corp. (AMR) tumbled 24.2% after saying it will reduce domestic flights and staff capacity by 11% to 12% in the fourth quarter, citing agonizing fuel costs and a tough macro environment overall.

That, together with the surge in crude, seemed to weigh on aircraft maker Boeing (BA). The stock lost 4.6% to become one of the day's worst-performing Dow components.

Soleil downgraded AMR and United operator UAL Corp. (UAL) to sell while cutting Continental (CAL) to hold from buy, and Lehman Brothers sliced its price targets on all three. UAL shares fell 29.5%, and Continental lost 13.2%.