Market Update: Dow Loses, Nasdaq Gains After Latest Fed Action
(Updated from 4:21 p.m. EDT)
Investors flip-flopped right up to the close after the latest action by the
Federal Reserve, a 25 basis-point reduction in the
fed funds rate. Stocks turned lower after the announcement, then higher, and the major market averages finally ended the day mixed.
The
Dow Jones Industrial Average closed down by 37.3 points, or 0.4%, to 10,435.2; it was 52 points higher before the decision was announced. The
Nasdaq Composite gained 10.1 points, or 0.5%, to about 2074.7. The
S&P 500, which tracks the broad market, lost 5.7 points to 1211.07.
Some economically sensitive stocks held up. They usually get a boost when the Fed lowers interest rates. Cyclical stocks ended the day in positive territory, while financial stocks were lower: The
Morgan Stanley Cyclical Index
gained 0.7%, while the
Philadelphia Stock Exchange/KBW Bank Index
lost 0.4%. Some defensive groups, for example drug stocks, were slightly lower. The
American Stock Exchange Pharmaceutical Index
lost 1.4%.
Since January, the central bank has cut the
fed funds rate, or the rate at which banks lend to each other overnight, six times. (The rate stood at 6.5% at the beginning of the year.) This year marks
Alan Greenspan's most aggressive rate-cutting schedule in his 14-year tenure as Fed chairman. At 3.75%, the funds rate is the lowest it has been since May 1994.
In its statement today, the Fed said it will remain watchful of the economy, leaving open the possibility of additional rate cuts. "The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the statement said.
There's been some concern that the aggressive rate cutting would spur inflation. Today, the Fed said: "The associated easing of pressures on labor and product markets are expected to keep inflation contained."
Market analysts are not holding out for an intermeeting cut. "There was no language in the Fed statement that hinted at a surprise cut, as there was in March," said Tony Crescenzi, chief bond market strategist at
Miller Tabak
. (There was an intermeeting cut on April 18.) "Either the Fed doesn't want the market depending on them or they don't think the economy warrants it."
Today's reduction breaks the sequence of five 50 basis-point cuts. Most market observers, however, had expected the Fed to pull back from its recent aggressive course. "The market will
ultimately take a 25 basis-point cut to mean the Fed sees the economy picking up," Peter Coolidge, managing director of trading at
Brean Murray Foster Securities
, said ahead of today's announcement.
"The expected effects of past rate cuts kept the Fed from moving more aggressively today," Crescenzi said. Yesterday's reports on
durable goods orders, new home sales and consumer confidence showed some strength in the economy.
But Wall Street has continued to get mixed signals from corporate America. After the closing bell yesterday, a couple of tech companies confessed to weakness in their bottom lines. Chipmaker
Xilinx
(XLNX) - Get Report
, which closed off by 8.96% to $39.93, lowered its revenue forecast, and networking-equipment maker
3Com
(COMS)
, which closed down by 4.6% to $4.62, missed its fourth-quarter earnings estimates.
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