The Dow Jones industrial average ended off 94.88 points, or 0.90%, to 10,470.57. The broader Standard & Poor's 500 index lost 12.07 points, or 1.02%, to 1,171.71. The Nasdaq composite index eased 18.17 points, or 0.91%, to 1,989.39.
Looking ahead to Wednesday, investors will get more news on inflation. The consumer price index (CPI) -- a gauge of inflation at the consumer level -- is expected to show a increase of 0.2%, vs. 0.1% in January. Excluding volatile food and energy prices, the core CPI is expected to rise 0.2%.
In a separate report, existing home sales for the month are seen slowing to a 6.55 million annualized pace from 6.8 million in the previous month.
Among the companies scheduled to report results on Wednesday are chemical and oil company Kerr-McGee (KMG
) and real estate investment trust Mills Corp. (MLS
On Tuesday, market action was guided by the Fed, which boosted the federal funds rate by a quarter-percentage point to 2.75%, and reassured the market by keeping its accomodative monetary policy statement relatively unchanged.
However, investors were spooked by a Fed warning that inflation threats are rising. "Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident," the Federal Open Market Committee said in its press release.
"While the 'measured' language was kept in, the 'pressure on inflation have picked up recently' comment was a main concern for the Street," says Informa Global Markets. "The statement prepared the Street for more rate hikes to come."
Informa adds that Fed's statement has reduced the period over which it feels it can look forward to maintaining a measured pace.
The Fed's move came after a key report showing that inflation at the wholesale level rose in February, but no more than expected. The producer price index (PPI) came in as expected, with the headline finished goods index up 0.4% vs. a median estimate of 0.4%. The core finished goods index, which strips out volatile food and energy prices, was up 0.1%, also as expected. The breadth of price gain in February is considerably less than in January, with car, capital goods, and drug prices all falling in February, Informa Global Markets says. Tame core finished goods prices and falling crude goods prices make this a much less scary report than in January, Informa adds.
Nevertheless, high oil prices will continue to weigh on the market. On Tuesday, oil prices fell after OPEC's president said there is no need to make a decision on an output hike for another 10-14 days. NYMEX May crude futures closed down $1.43 at $56.03 a barrel.
Among the big losers Tuesday was video game maker Electronic Arts (ERTS
), which plunged 17% after warning of weaker-than-expected earnings.
Keeping the Dow from bigger losses was news that Altria Group (MO
), the corporate name behind cigarette maker Philip Morris USA, is trying to settle its fraud and racketeering case with the U.S. government, the Wall Street Journal reported.
In earnings news, telecom equipment maker Nortel Networks (NT
) posted third-quarter results that were slightly below its own forecast, leading several analysts to cut their target price on the stock.
Homebuilder KB Home (KBH
) posted higher-than-expected quarterly results, reflected the unflagging boom the booming home-building sector.
Drugmaker Wyeth (WYE
) forecast first-quarter earnings, excluding some items, will top last year's results and will exceed analyst estimates.
Spice maker McCormick & Co (MKC
) posted lower quarterly results because of a lower profit margin on sales of its spices that use vanilla beans.
On the merger front, business software maker Oracle (ORCL
) said it would buy retail software maker Retek for about $670 million.
In other news, aluminum producer Alcoa (AA
) said it will slash 2,000 jobs over the next year as part of a new global business structure.
Treasury prices dropped after the Federal Reserve's decision on interest rates, with the yield on the 10-year note spiking to 4.62%.
European stock markets closed mixed on Tuesday. London's Financial Times-Stock Exchange 100 index was up 3.8 points, or 0.08%, at 4,937.30 following report that the U.K. consumer price index in February rose 0.3% or at a 1.6% annual rate after falling 0.5% in January. The government officials suggest productivity gains are offsetting price increases. The Bank of England is unlikely to raise rates soon.
Germany's DAX index gained 24.33 points, or 0.57%, to 4,320.69 as oil futures drift at mostly lower level. E.ON and RWE were lower after ABN Amro reiterated its negative tack on the shares.
In Paris, the CAC 40 index gained 14.18 points, or 0.35%, to 4,047.18 following a report that French consumer spending plunged 1.0% in February after rising 2.1% in January, which was revised from 1.5%.
In Japan, the Nikkei index fell 37.84 points, or 0.32%, to 11,841.47. Investors played cautious ahead of the U.S. Federal Reserve's meeting. Fuji TV sank 6.8% on news that the company is considering to raise 100 billion yen to thwart a takeover attempt by Livedoor. On the upside, Momiji Holdings jumped 10.6% after it announced a plan for capital tie-up with Yamaguchi Bank.
In Hong Kong, the Hang Seng index lost 57.88 points, or 0.42%, to close at 13,776.47.