Stocks dive, then soar on Fed decision By JOE BEL BRUNO, AP Business Writer

Stocks dive, then soar on Fed decision By JOE BEL BRUNO, AP Business Writer
59 minutes ago



NEW YORK - Wall Street overcame disappointment in the Federal Reserve's failure to move toward an easing of interest rates Tuesday, and stocks made a late-day surge as the decision was seen as a sign the economy wasn't threatened by turmoil in the credit markets.

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Investors were at first deeply disappointed that policymakers, who kept benchmark rates on hold at 5.25 percent, did not provide any hints about a possible cut. But, after digesting the policy statement, they quickly gained solace the economy is likely to withstand troubles in the mortgage industry. The Dow Jones industrials rose into positive territory from a 121 point deficit right after the decision was announced.

The Fed's Open Market Committee's economic assessment said the central bank's predominant concern "remains the risk that inflation will fail to moderate as expected." Wall Street was relieved the Fed didn't consider of bigger concern recent anxiety about how tightening credit standards will affect the economy, which has caused stocks to wobble in the past two weeks.

The statement — while noting credit problems, continuing weakness in the housing market and the market's turbulence — stood fast by the Fed's inflation policy. It gave little new insight into which way policymakers were leaning about a possible interest rate cut, however.

"I think what the Fed is trying to tell us is the economy is still in reasonably good shape, they're still concerned about inflation and they welcome the repricing of risk as long as it does not result in the markets seizing up from a liquidly standpoint," said Robert Auwaerter, head of fixed income portfolio management at Vanguard Group.

The Dow gained 35.52, or 0.26 percent, to 13,504.30. The blue chip index had risen as much as 102 points after the decision; it is the first time since July 30 that it hasn't closed with a triple-digit gain or loss.

The Standard & Poor's 500 index rose 9.04, or 0.62 percent, to 1,476.71, while the Nasdaq composite index rose 14.27, or 0.56 percent, to 2,561.60. The Russell 2000 index of smaller companies fell 7.22, or 0.94 percent, to 773.61.

In recent weeks, the major stock market indexes have traded erratically, with the Dow routinely showing triple-digit swings. The frenetic trading follows the stock market's high seen July 19, when the Dow closed above 14,000 for the first time and the S&P 500 index also saw a record finish.

Treasury bonds fell as investors moved back into stocks, with the yield on the 10-year note climbing to 4.77 percent from late Monday's 4.74 percent. Investors had been moving into safer investments, like Treasuries, to avoid volatility in major market indexes.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude oil for September delivery rose 36 cents to settle at $72.42 a barrel on the New York Mercantile Exchange. A week ago, crude closed at a record $78.21 a barrel.

Wall Street also was pleased by a Labor Department report that indicated productivity of U.S. workers increased last quarter as the economy rebounded, and labor costs began to retreat. Productivity more than doubled from the first quarter.

Labor costs rose during the period at a 2.1 percent pace, and surpassed Wall Street projections. It was the second-straight quarter in which wage pressures have cooled, which could help assuage some of the Fed's concerns about inflation.

But, for the moment, it appears policymakers remain on track in their thinking about the economy. The Fed expects moderate economic growth even though credit conditions have tightened for some customers and business.

Analysts believe there wasn't too much new in this statement compared to comments issued after their previous meeting — and that in itself might have led to the market's volatility. Some investors were looking for a stronger statement about credit markets, where others might have been listening for indications of a rate cut or signs inflation is waning.

"Nobody was surprised, at the Fed's language. There wasn't any positive or really negative news," said Brett Hammond, chief investment strategist for TIAA-CREF. "Beyond seeing a concern about inflation, now they've acknowledged the credit crunch and volatile markets — it has stuck in people's minds that they are pointing these things out."

In corporate news, Marsh & McLennan Cos. fell $1.54, or 5.6 percent, to $26.11. The largest U.S. insurance brokerage turned in a 3 percent increase in its second-quarter profits amid growth in its risk and insurance business and consulting operations. The company also approved a $1.5 billion share-repurchase plan.

Duke Energy Corp. rose 96 cents, or 5.4 percent, to $18.86. It reported second-quarter profit fell $1.27 percent after it spun off its natural gas business at the beginning of the year.

Tyco International Ltd. shed 56 cents to $47.44 after it fell to a fiscal third-quarter loss due to hefty charges primarily related to a legal settlement. Adjusted results managed to top Wall Street's expectations, however.

Advancing issues outpaced decliners 3-to-2 on the New York Stock Exchange, where consolidated volume came to 4.71 billion shares, down from a very heavy 5.09 billion Monday.

Overseas, European markets rose higher following Monday's U.S. advance. London's FTSE 100 closed up 1.93 percent, Germany's DAX index rose 0.93 percent, while France's CAC-40 rose 1.58 percent. Japan's Nikkei stock average closed up 0.04 percent.

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