Noncommittal Fed Leaves Stocks Cold

The averages tick lower as the FOMC hints at another hike.
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Updated from 3:41 p.m. EST

Stocks closed to the downside Tuesday after the

Federal Reserve

, in Alan Greenspan's last meeting as chairman, raised short-term rates by another quarter-point and suggested that its long series of hikes isn't over.

The

Dow Jones Industrial Average

was erratic after the meeting, but ended with a loss of 35.06 points, or 0.32%, at 10,864.86. The

S&P 500

was off 5.12 points, or 0.4%, to 1280.08, and the

Nasdaq Composite

slipped 0.96 point, or 0.04%, to 2305.82.

"Many investors stayed on the sidelines today, and as a result we got a lower close," said Michael Sheldon, chief market strategist with Spencer Clarke. "We're still one step closer to the end of the rate-tightening cycle, but the Fed did leave the door open for one more rate hike in March. It was really an uneventful session with a negative bias."

About 1.95 billion shares traded on the

New York Stock Exchange

, with advancers beating decliners by a 9-to-8 margin. Trading volume on the Nasdaq was 2.07 billion shares, with advancers matching decliners.

The 10-year Treasury had little reaction to the announcement, with the yield ticking up to 4.53% from 4.52%. The dollar fell against the yen and the euro.

With Greenspan at the helm for the final time, the policymaking Federal Open Market Committee lifted rates for the 14th straight meeting going back to June 2004. The federal funds target rate now stands at 4.50%, the highest level since the spring of 2001.

Policymakers were noncommittal regarding their March 28 meeting. "The committee judges that some further policy firming may be needed" to preserve the economic balance, their statement said. On Dec. 13, policymakers said that "some further measured policy firming is likely to be needed."

"The only uncertainty was how the markets would interpret the comments," Sheldon said "Heading into the next Fed meeting, investors will have to keep their eyes on any economic indicator which highlights changes in resource utilization in the economy."

The Fed said that "core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures."

Robert Pavlik, chief investment officer with Oaktree Asset Management, said investors were a bit disappointed with the Fed's suggestion that rate-tightening might continue if it perceives a threat from inflation.

"There is a contingent of people who thought this would be the last rate hike," he said. "We haven't sold off completely today, as many have been expecting a rate hike in March anyway."

To view Gregg Greenberg's video take of the market, click here

.

Shortly after the Fed's decision became known, the Senate approved the nomination of Ben Bernanke to serve as the central bank's next chairman. Greenspan was named to oversee the Fed in 1987 by President Reagan.

Oil was lower after OPEC ministers in Vienna pledged to keep production rates high. The market looked past calls from all five permanent members of the U.N. Security Council to hold a hearing on Iran's recently restarted nuclear program. March crude closed down 43 cents to finish at $67.92 a barrel.

The other major event hanging over trading was the president's state of the union address, scheduled for tonight. President Bush is expected to push for broader tax deductions for health care expenses and expanded use of health savings accounts in high-deductible insurance policies.

Tuesday was another huge earnings day, with results from

Altria

(MO) - Get Report

,

Merck

(MRK) - Get Report

,

Valero

(VLO) - Get Report

and

Google

(GOOG) - Get Report

.

Dow component Merck said fourth-quarter earnings rose 1% from a year ago to $1.12 billion, or 51 cents a share, while sales were little changed at $5.77 billion. On an adjusted basis, Merck earned 64 cents a share, beating the Thomson First Call consensus by 2 cents. Merck also offered first-quarter guidance that was in line with estimates. The stock added 4 cents, or 0.1%, to finish at $34.50.

Another Dow component, Altria, reported fourth-quarter earnings of $2.29 billion, or $1.09 a share, up from $1.99 billion, or 96 cents a share, a year ago. Revenue increased 9.4% to $24.49 billion from last year. Altria guided 2006 estimates to a profit of $4.85 to $4.95 a share, including a restructuring charge of 36 cents a share. The Thomson First Call consensus is for a profit of $5.48 a share. Altria slid by $1.57, or 2.1%, to close at $72.34.

Valero said fourth-quarter earnings jumped to $1.3 billion, or $2.06 a share, almost tripling last year's profit of $489 million, or 88 cents a share. Excluding a $55 million pretax gain, the company would have earned $2 a share, ahead of the Thomson First Call consensus for EPS of $1.94. Valero was lower by 77 cents, or 1.2%, to $62.43.

After the bell, Google posted non-GAAP earnings of $1.54 a share for the first quarter, including a higher-than-expected tax rate. Analysts were expecting a lot more: an average of $1.76 a share. The shares fell 12% after hours.

Meanwhile, shares of

Napster

(NAPS)

surged 25.3% after a report in the

New York Post

said Google was eyeing the online music company. Google later said it wasn't pursuing Napster. Still, the stock finished up 79 cents to $3.91.

Earlier,

Knight Ridder

(KRI)

said fourth-quarter earnings fell 22% from a year ago to $83.3 million, or $1.24 a share. The results were 2 cents ahead of estimates. The stock lost $1.20, or 1.9%, to $62.25.

Phelps Dodge

(PD) - Get Report

said fourth-quarter net income fell to $121.3 million, or $1.19 a share, from $341.1 million, or $3.40 a share, a year earlier. The company had charges of $204.2 million, or $2.01 a share, in the fourth quarter. The Thomson First Call consensus was for earnings of $3.97 a share. Phelps Dodge was down $1.60, or 1%, to close at $160.50.

Pepsi Bottling

(PBG)

reported fourth-quarter net earnings of $34 million, or 30 cents a share, unchanged from last year's fourth-quarter results. On an adjusted basis, Pepsi Bottling earned 34 cents a share on revenue of $3.66 billion, beating forecasts. Pepsi Bottling also offered 2006 guidance that was higher than estimates. Shares slipped 37 cents, or 1.3%, to $29.

Late Monday,

Goodyear

(GT) - Get Report

said a rise in raw-material costs will eat into fourth-quarter earnings. Goodyear pegged fourth-quarter operating income around $238 million, unchanged from a year ago. Goodyear tumbled $3.12, or 16.6%, to $15.64.

Among ratings, Banc of America Securities upgraded

Wendy's

(WEN) - Get Report

to neutral from sell, citing an improved outlook for the fast-food chain. The firm also raised its stock price target to $57 from $45. Shares rose 20 cents, or 0.3%, to $58.95.

On the economic front, the Chicago branch of the National Association of Purchasing Management said its index fell to a reading of 58.5 in January from 61.5 in December. Economists were expecting the index to come in at a reading of 59.8.

"The Chicago PMI has been very volatile over the past couple of years, probably as a result of the tribulations of the auto industry," said Ian Shepherdson, chief economist with High Frequency Economics. "As a result it has become a less reliable indicator of movements in the national ISM and the January dip does not necessarily mean the ISM will follow suit."

Also, the Conference Board said consumer confidence rose in January to a reading of 106.3 from 103.6 in December, the highest level in three years. The index had been expected to rise to 105.0.

Earlier, the Labor Department said the employment cost index rose 0.8% in the fourth quarter, unchanged from the previous quarter. For the full year, the index rose 3.1%, the lowest gain since 1996.

Overseas markets were flat to lower, with London's FTSE 100 down 0.3% at 5760 and Germany's Xetra DAX up 0.3% at 5674. In Asia, Japan's Nikkei fell 0.6% overnight to 16,650, while Hong Kong's market remained closed for a holiday.