Stocks finished lower Tuesday, after the Federal Reserve decided to leave interest rates unchanged, as widely expected, but warned of further potential weakness in the U.S. economy. Meanwhile, concerns about possible military action against Iraq and the sluggish recovery continued to hang over the markets.
The target federal funds rate, the interest banks charge each other on overnight loans, remains unchanged at 1.75%. Commercial banks' prime lending rate a benchmark for many loans will remain at 4.75%, the lowest level since November 1965. So far this year, the Fed has left the funds rate unchanged.
"Considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks," the Federal Open Market Committee said in its post-meeting statement. The committee added the risks overall are weighted mainly toward conditions that may generate economic weakness.
In contrast to the last several policy meetings, the decision was not unanimous. Two FOMC members, Edward M. Gramlich and Robert D. McTeer, Jr., voted against the action. Governor Gramlich and President McTeer preferred a reduction in the target for the federal funds rate.
Also noteworthy in the FOMC statement: the committe cited "the emergence of heightened geopolitical risks." This suggests that the Fed is cognizant of war risks, but perhaps is saving its policy ammunition until any such event takes place, according to MMS International.
Earlier in the session, equities were able to pare some of their losses after the release of a better-than-expected reading on a closely watched gauge of consumer sentiment. The Conference Board, a private business research group, said its index of consumer attitudes fell to 93.3 in September -- its lowest since November 2001 -- from a revised 94.5 in August, according to wire-service reports. Analysts had expected the index to fall to 92.3. The index is down 17 points from a recent peak of 110.7 in March.
Among the stocks in the news, Xerox (XRX) said the U.S. attorney's office in Bridgeport, Conn., is investigating its past accounting practices. The announcement of the investigation comes more than five months after the copier maker paid a record $10 million to the Securities and Exchange Commission to settle charges it manipulated its financial results to defraud investors and inflate earnings, according to wire reports. Shares of Xerox were down sharply.
In the financial services sector, Goldman Sachs (GS) said its quarterly earnings rose on strong bond derivative and currency trading, while profits fell at Wall Street rival Lehman Brothers (LEH) on weak stock and bond trading, according to news reports.
The Dow Jones industrial average tumbled 188.88 points, or 2.40%, to 7,683.27. The Nasdaq composite index was near unchanged levels, off 2.63 points, or 0.22%, to 1182.30. The tech-heavy gauge benefited from short-covering.
The broader Standard & Poor's 500-stock index dropped 14.44 points, or 1.73%, to 819.27. Among the worst-performing sectors were banks, computer hardware and conglomerates. Among the top performing groups were biotechs, semiconductors and software.
Prices of U.S. Treasury issues surged following the release of the Fed's decision. MMS International notes that two dissenting FOMC members argued for a cut in rates, which slants the bias to ease even further that direction.
European markets closed with losses. In London, the Financial Times-Stock Exchange 100 index was off 68.30 points, or 1.83%, to 3,671.10, as Prime Minister Blair pressed case for attacking Iraq, which was driving oil prices sharply higher.
In France, the CAC 40 shed 51.50 points, or 1.84%, to 2,742.81, as French consumer spending fell 0.1% in August, and a published report says French social security deficit will rise in 2003.
And in Germany, the DAX Index was lower by 41.04 points, or 1.41%, to 2,873.21, on Iraq war fears and negative corporate earnings news.
In Asia, the markets finished lower. The Nikkei fell 159.44 points, or 1.68%, to 9,321.64. on growing pessimism over U.S. equities and the country's cooperate earnings. The market players expressed disappointment as the Japan's Council on Economic and Fiscal Policy (CEFP) has decided to wait until the end of October to announce any specific measures to boost the economy and reform financial systems, according to MMS. In Hong Kong, the market lost 117.19 points, or 1.26%, to 9,197.68.