US stocks end off highs on Fed’s mixed signals

CIOL Bureau
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NEW YORK: US stocks rose on Wednesday, though ended off their highs, as the Federal Reserve announced it was leaving interest rates unchanged but indicated it could jack them up again in the near future.

The announcement sent a mixed signal that was initially received positively by investors but then unnerved some as the prospect of higher rates down the road sank in. Technology issues, particularly computer makers, ended with gains, but banks and retailers were mostly lower.

"The reality is starting to sink in that we are still going to be on Fed watch," said Guy Truicko, portfolio manager at Unity Management in Garden City. "That, kind of puts a cap on the upside in the near term. It leaves us where we were before - in a trading range. The market is not going to be let out of the bag because of the Fed warning on future rate hikes."

Most Wall Street players had expected the Fed to hold its fire this month before taking rates up again, perhaps as early as its Aug. 22 meeting, to prevent the US economy from steaming ahead so fast that it triggers an acceleration in inflation.

Based on early and unofficial closing figures, the Dow Jones industrial average gained 23.33 points, or 0.22 per cent, to 10.527.79. It was up as much as 106 points soon after the Fed's decision was announced. Strength was largely coming from the blue-chip gauge's technology names, led by computer maker Hewlett-Packard Co., which shot up 7-1/16 to 123-11/16. HP's advance came after Lehman Brothers added the company to its 10 "uncommon value" stocks list, which includes stocks it believes, will outperform the market over the next year.

Among other top technology issues, International Business Machines Corp. gained 4 to 113-11/16, and leading microchip producer Intel Corp. rose 1 to 132-3/8. Among the Dow's financial and retail issues, the biggest losers included banking concern J.P. Morgan & Co., which slipped 2-1/8 to 116-5/8, and home improvements retailer Home Depot Inc., which dropped 1-3/16 to 48-3/8.

The technology-dominated Nasdaq composite index finished up 81.38 points, or 2.11 per cent, to 3,940.34.

Long-distance telephone company WorldCom Inc., one of the Nasdaq's most heavily traded shares, gained 4-7/8 to 44-9/16 on speculation that it could be a takeover target for a foreign carrier. WorldCom's rise came after the Justice Department filed a suit to block its planned $120 billion merger with Sprint Corp. on antitrust grounds.

Sprint, which is listed on the New York Stock Exchange, was off 5-5/8 to 52-3/4.

The market managed to shrug off negative news from mobile phone technology company Qualcomm Inc., which said it may see slightly lower chipset orders in the fourth quarter. Qualcomm ended down just 1/8 at 63-9/16.

Broader measures of the market were also higher, with the Standard & Poor's 500 index up 4.27 points, or 0.29 per cent, to 1,454.82.

Since June last year, the central bank has hiked rates six times, most recently by an aggressive 0.50 percentage point. Although Wednesday's do-nothing move leaves the federal funds overnight bank lending rate target at 6.50 per cent, the central bank warned of inflation risks ahead.

The Fed said recent signs of a slowdown in economic growth were still "tentative and preliminary." Wall Street players interpreted the Fed comments to mean that the inflation-busting central bank may resume its campaign of raising interest rates later this summer. Higher interest rates can hurt stocks because they can squeeze corporate profits, a key indicator of a company's performance.

The Fed's warning of inflation dangers came after a report earlier in the day that contradicted recent data suggesting that the pace of the US economy's growth is letting up.

Orders for US durable goods surged 6 per cent in May, driven by strong demand for electronics as the manufacturing sector overcame an unexpected slump seen in April. The spike in May orders was much stronger than the 2.8 per cent gain forecast by economists in a Reuters poll.

(C) Reuters Limited 2000.