Stocks pull back after Fed rate cut

NEW YORK - A still-anxious Wall Street closed lower Wednesday, sacrificing the advance it made after the Federal Reserve cut interest rates half a percentage point. Investors collected profits after nearly three sessions of big gains, unwilling to leave money on the table amid ongoing economic uncertainty.

It wasn't surprising that the market pulled back, having suffered months of losses and having driven the Dow Jones industrials up more than 470 points so far this week ahead of the late-day downturn.

Anthony Conroy, managing director and head trader for BNY ConvergEx Group, said expectations of more downgrades of bond insurers like Ambac Financial Group Inc. and MBIA Inc. — as well as uneasiness ahead of Thursday's Commerce Department report on personal income and spending inflation — was enough to spur people to cash in profits from the market's initial gains.

Key reports on the job market and manufacturing set to arrive Friday could also add to investors' concerns about the state of the economy, which has been dragged down by a crumbling housing market and losses at major financial institutions.

"Volatility is here to stay," Conroy said. "People who think these issues will go away overnight in one Fed rate cut are mistaken."

The Federal Reserve lowered the fed funds rate, or the interest banks pay one another for overnight loans, to 3 percent, the lowest level since spring 2005. It also lowered the discount rate, or the interest the Fed charges on loans to banks, by a half-point to 3.50 percent.

Scott Fullman, director of investment strategy for I.A. Englander & Co., said it was unlikely the market's downturn was because of disappointment over the rate cut or the Fed's accompanying statement, which if anything asserted that the central bank is willing to lower rates further if needed.

The Dow, which had been up more than 200 points after the Fed's decision, finished down 37.47, or 0.30 percent, at 12,442.83.

"We're seeing profit taking ahead of the employment report on Friday," Fullman said, referring to the Labor Department's data on job creation and unemployment. "The market has had a really nice run-up this week, and investors are taking advantage of that."

Broader stock indicators also turned lower. The Standard & Poor's 500 index fell 6.49, or 0.48 percent, to 1,355.81, and the Nasdaq composite index fell 9.06, or 0.38 percent, to 2,349.00.

Government bond prices rose as the stock market pulled back. The yield on the 10-year benchmark note fell to 3.63 percent from 3.68 percent late Tuesday.

The Fed's decision to cut rates follows an emergency rate cut last week of three-quarters of a percentage point. The central bank stepped in at the time after global markets worldwide fell sharply amid fears that the U.S. economy was tipping into recession and would hurt the global growth. The move was the biggest one-day move in more than 20 years.

The rate cuts came on the same day as fresh evidence arrived that the economy had slowed significantly in the final three months of 2007. Figures showed gross domestic product expanded at a slight 0.6 percent pace in the fourth quarter, less than half what had been expected. For all of 2007, gross domestic product grew 2.2 percent, the weakest rate since 2002.

Wednesday's move was the fifth cut the Fed made since it began making reductions in September following turmoil in the credit markets and in stocks markets.

"The consumer is essentially under enormous pressure," said Thomas J. Lee, chief U.S. equities analyst at JPMorgan. Lee said that even if the $146 billion tax rebate and business incentive package proposed by the Bush administration is passed Feb. 15 by Congress, it is going to take some time to get into the hands of consumers.

The subprime mortgage crisis has been creating problems for homeowners and financial centers alike. Worries about the health of bond insurers was also believed to play a part in Wednesday's decline; Meredith Whitney, an Oppenheimer and Co. analyst, wrote in a research note before the market opened that ratings agencies are likely to downgrade already-pummeled insurers.

Meanwhile, Swiss bank UBS said it will have a $11.4 billion fourth-quarter loss mostly because of bad investments in subprime mortgages. Analysts had expected a much smaller shortfall. French bank BNP Paris Wednesday said its quarterly profit will decline by 40 percent from year-earlier levels.

And after the market closed Wednesday, Standard & Poor's downgraded about $50 billion worth of mortgage-backed securities and placed another $217 billion worth on negative watch. The ratings agency said big losses could be felt soon by smaller U.S. banks and credit unions, and European banks that have not yet revealed large write-downs. S&P said it believes total losses for financial institutions will eventually reach more than $265 billion.

On Thursday, the Commerce Department releases its December personal spending report, which includes the closely-watched personal consumption expenditures deflator. The department's GDP report showed that core prices, which exclude food and energy, rose at a 2.7 percent rate in the fourth quarter — up from 2 percent in the third quarter of 2007, and the largest quarterly jump since the spring of 2006.

If inflation becomes a bigger worry for the Fed than economic growth, as it was in the early part of last year, the central bank may hesitate to lower rates further.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where consolidated volume came to 4.64 billion shares, up from Tuesday's 4.07 billion.

The Russell 2000 index of smaller companies fell 9.71, or 1.38 percent, at 695.49.

Crude oil rose 69 cents to settle at $92.33 a barrel on the New York Mercantile Exchange.

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

Overseas markets closed lower ahead of the U.S. rate decision. In Tokyo, the Nikkei fell 0.99 percent. In Europe, London's FTSE 100 dropped 0.81 percent, Paris' CAC 40 lost 1.37 percent and Frankfurt's DAX fell 0.26 percent.

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