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Stocks End on a Down Note

An early rally on Wall Street is erased in the afternoon. Bond prices fall.

Updated from 4:21 p.m. EST

Stocks in the U.S. gave up early gains and closed lower Wednesday as comments from a

Federal Reserve

official reminded traders the central bank is keeping its eye on inflation, putting a slight dent in the hopes of the rate-cut camp.

The

Dow Jones Industrial Average

lost 65.03 points, or 0.5%, to 12,200.10, and the

S&P 500

surrendered 10.19 points, or 0.8%, to 1326.45. The

Nasdaq Composite

fell 30.82 points, or 1.3%, to 2278.75.

The downturn came in the afternoon and erased a modest rally that lasted through midday. Traders attributed some of the pullback to comments from Philadelphia Fed President Charles Plosser, who said inflation was still a concern for policymakers.

Lately, the Fed had gotten away from talk of rising prices as it dealt with market turmoil and reduced rates, so the remarks about inflationary concerns may have investors, who want more easing, worried.

During a speech, Plosser said that while inflation expectations haven't changed a great deal, "they bear watching because there are some signs that they ... are edging higher. These may be early warning signs of a weakening of our credibility, and we must be very careful to avoid that."

Also, the markets took a blow when

Macy's

(M) - Get Macy's Inc Report

said it would cut more than 2,000 jobs and gave a pessimistic outlook about the health of the consumer. The retailer's shares shed 4.6% to $23.94.

Consumer activity comprises about two-thirds of U.S. gross domestic product, meaning any problems on that front could lead the economy ever closer to a recession.

"We're kind of waiting for the next catalyst," said Bill Nichols, trader at Bear Stearns. "People are looking ahead to tomorrow's jobless-claims numbers. We're working through the same issues that have dogged the market for the last few months," such as housing weakness, along with subprime and credit-market woes.

Investors earlier had cheered strong earnings from

Walt Disney

(DIS) - Get Walt Disney Company Report

and

JDSU

(JDSU)

, sending the market higher before momentum sputtered in the midafternoon.

Dow component Disney gained 4.8% after it topped analyst targets for its latest quarter amid sturdy results from its theme parks and TV divisions. JDSU surged 26% on the heels of its upbeat second-quarter report. Adjusted earnings of 22 cents and sales of $399.2 million both exceeded expectations.

Turning to the day's economic data, fourth-quarter productivity came in much better than expected, climbing 1.8% and more than tripling forecasts. Still, the rate of growth slowed markedly from the third quarter's 6%. Unit labor costs were up 2.1%, below the anticipated 3.5% increase.

"Investors need to be patient and give the Fed a chance," said Ted Weisberg, floor trader at Seaport Securities. "One can assume that eventually we will begin to see positive traction from lower interest rates."

Meanwhile,

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

lost 3.4% on word homebuilding revenue for the fiscal first quarter fell 22% from a year ago to $842.7 million. Pending home-sale data for December will be released Thursday.

Exchanges fared poorly after the Justice Department expressed concern about an inhibition of competition in the industry.

Nymex

TheStreet Recommends

(NMX)

and

CME

(CME) - Get CME Group Inc. Class A Report

tumbled more than 17%.

IntercontinentalExchange

(ICE) - Get Intercontinental Exchange, Inc. (ICE) Report

slipped 7%.

The airline space saw strong gains, which Todd Clark, director of trading at Nollenberger Capital Partners, attributed to "rampant talk of consolidation."

US Airways

(LCC)

was up 5.4%, while

Continental Airlines

(CAL) - Get Caleres, Inc. Report

added 2% and

AMR

(AMR)

, the parent company of American Airlines, gained 4.2%.

The airlines were likely also helped by the decline in the price of oil. Crude fell $1.27 to $87.14 a barrel. Gold was up $14.70 to $905 an ounce.

In other earnings news,

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

posted in-line quarterly numbers following the close of the session.

Time Warner

(TWX)

said its fourth-quarter earnings slumped year over year, but adjusted profits met analysts' consensus estimate. Revenue edged up 2% to $12.6 billion, driven mainly by increases at the cable and filmed-entertainment segments. AOL's revenue slumped 32% to $1.3 billion. The stock gained 2%.

Treasury prices were easing. The 10-year note was down 9/32 in price, yielding 3.61%, and the 30-year bond was off 21/32 to yield 4.36%. The dollar fell against the euro and the yen.

Among analyst actions, Bear Stearns downgraded

Ford

(F) - Get Ford Motor Company Report

to peer perform from outperform and cut its rating on

GM

(GM) - Get General Motors Company (GM) Report

to underperform from peer perform.

Yahoo!

(YHOO)

was lowered to market perform from outperform at BMO Capital.