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U.S. stocks fall as Fed hints at more rate hikes
Thu Jun 30, 2005 06:03 PM ET
By Anupama Chandrasekaran
NEW YORK, June 30 (Reuters) - U.S. stocks fell on Thursday after the Federal Reserve raised key interest rates a quarter point for a ninth straight time and signaled that more rate increases are in store.
The U.S. central bank's policy-setting Federal Open Market Committee voted unanimously to raise the federal funds rate, charged on overnight loans between banks, to 3.25 percent -- its highest level since mid-September 2001 -- from 3 percent.
While a ninth rate increase was expected, financial markets were hoping the Fed would indicate that the campaign of rate increases was coming to an end in a year when companies are expecting a slowdown in profit growth. Instead, the FOMC said it believed it could continue to raise rates at a "measured" pace, a sign that more quarter-percentage-point rate increases are ahead.
The blue-chip Dow Jones industrial average dropped 99.51 points, or 0.96 percent, to end at 10,274.97. The broad Standard & Poor's 500 Index slipped 8.52 points, or 0.71 percent, to finish at 1,191.33. The technology-laced Nasdaq Composite Index lost 11.93 points, or 0.58 percent, to close at 2,056.96.
"The market was looking for any sign that this process is winding down and this statement doesn't give any sense the Fed is done," said Bill Strazzullo, chief market strategist of State Street Global Markets.
"It's a slight negative for equity markets because there's nothing that gives a clue we're close to the end," Strazzullo added.
Higher interest rates are typically bad for stocks since they raise the cost of borrowing money for consumers and corporations.
Despite some recent signs of economic softness resulting in part from oil prices near record highs, the Fed's desire to curb inflation looked like it would keep official U.S. interest rates on an upward path for now. The FOMC's next meeting is on Aug. 9.
Shares of industrial companies, which are the benchmarks of the U.S. economy, slid after the Fed's rate increase. Heavy-equipment maker Caterpillar Inc. fell 1.4 percent, or $1.33, to $95.31 and chemical maker DuPont dropped 3.6 percent, or $1.62, to $43.01.
U.S. Treasury bond prices climbed on Thursday as investors shrugged off the Fed's latest interest-rate increase and appeared to bet the economy's future was less rosy than policy-makers suggested. The price of the benchmark 10-year U.S. Treasury note rose 18/32 to 101-22/32, while its yield fell to 3.92 percent from 3.99 percent on Wednesday.
For the second quarter, the Dow ended down 2.2 percent, the S&P 500 rose 0.9 percent and Nasdaq climbed 2.9 percent.
In the month of June alone, the Dow slipped 1.8 percent, the S&P 500 inched down 0.01 percent and the Nasdaq fell 0.5 percent.
For the year so far, the Dow is down 4.7 percent, the S&P 500 is off 1.7 percent and the Nasdaq is down 5.5 percent.
BANK OF AMERICA, 3M WEIGH
On the corporate front, Bank of America Corp. said it agreed to buy MBNA Corp. (, the biggest independent credit card lender, for $35 billion, making the No. 2 U.S. banking company one of the world's biggest card issuers. [ID]
Bank of America lost 2.8 percent, or $1.30, to $45.61, while MBNA jumped 24.3 percent, or $5.11, to $26.16.
Shares of Dow component Boeing Co. shot up 7 percent, or $4.33, to $66 after the aircraft maker named 3M Co. ( Chief Executive James McNerney as chairman and CEO, favoring him over candidates inside Boeing's ranks.
In other acquisition news, Countrywide Financial Corp. , the largest U.S. mortgage lender, said it will acquire almost all the assets of KB Home's mortgage business. Countrywide's stock rose 0.5 percent, or 20 cents, to $38.61, while KB Home's shares gained 1.5 percent, or $1.14, to $76.23.
Shares of Dow component 3M, where McNerney is widely credited with overseeing a turnaround after he joined the diversified manufacturer in 2001, declined nearly 5 percent, or $3.74, to $72.30.
After the closing bell, shares of Pixar Animation Studios sank almost 10 percent to $45.14 on the Inet electronic brokerage network from a Nasdaq close at $50.05. The stock slid after the company said it was cutting its fiscal second-quarter earnings target to account for the possibility of higher-than-expected returns of "The Incredibles" DVDs.
LOWER OIL OF LITTLE HELP
Meanwhile, U.S. crude futures fell more than $1 to below $56 a barrel as funds sold when heating oil futures pared gains. NYMEX August crude futures settled at $56.50, down 76 cents, after dropping as low as $55.90.
While lower oil prices are usually good for stock markets, they weigh on shares of oil companies whose profits depend on the price of oil. Dow component Exxon Mobil Corp. ( , the world's largest publicly traded oil company, skidded 1.7 percent, or 97 cents, to $57.47, while rival oil producer and refiner ConocoPhillips slipped 0.5 percent, or 28 cents, to $57.49.
Thursday is the last day of the second quarter, a time when trading can be volatile as fund managers square up their positions.
Decliners outpaced advancers by a ratio of about 9 to 8 on the New York Stock Exchange, and on Nasdaq, by about 8 to 7.
About 1.63 billion shares changed hands on the NYSE, above the 1.46 billion daily average for last year, while on Nasdaq, about 1.77 billion shares were traded -- below the 1.81 billion daily average last year.