As Optimism Over Fed Move Dims, Stocks Fall

Wall Street's enthusiasm for the Federal Reserve's move to cut a key interest rate faded yesterday, prompting modest stock losses and sending the value of the dollar sliding.

The Dow Jones industrial average fell 1.1 percent, or 99.80 points, to close at 8824.34, while the Standard & Poor's 500-stock index was down 1 percent, or 8.76 points, to 904.42. The tech-heavy Nasdaq composite index fell 0.7 percent, or 10.58 points, to 1579.31.

Stocks had rallied more than 4 percent Tuesday after the Fed announced that it would lower a key target rate to a range of zero to 0.25 percent -- a historic low. It is not surprising investors would sell off to lock in profits, analysts said. But yesterday's losses were also tied to fears that the Fed may be running out of tools to combat the recession at a time when the country's economic woes are deepening, analysts said.

"They did the shock-and-awe thing and caught people by surprise," said E. William Stone, chief investment strategist for PNC Wealth Management in Philadelphia. "On the other hand, no policy action has worked so far. This thing is not going to turn around overnight."

The impact of the move could be felt throughout several sectors. Demand for Treasury bonds, already at historic highs, increased and gold prices surged. Meanwhile, the value of the dollar tumbled, trading at a 13-year low against the Japanese yen. It fell nearly 3 percent against the euro before regaining some ground.

"I remain a dollar bull but am getting a bit nervous. The speed of this move has been pretty scary," said Win Thin, senior currency strategist for Brown Brothers Harriman.

The Fed's plan to buy mortgage-backed securities, which it said Tuesday could be expanded, is also having an impact. For borrowers with sizeable equity in their home or a significant down payment, the average interest rate fell to 5.18 percent from 5.44 percent for a 30-year, fixed-rate loan, according to Mortgage Bankers Association data released yesterday.

But the financial sector is still grappling with the impact of the economic crisis. A day after Goldman Sachs reported that it had fallen into the red for the first time since becoming a public company in 1999, Morgan Stanley reported a loss of about $2.3 billion yesterday. The loss was worse than expected by analysts.

Goldman Sachs gained 3.7 percent, to $78.78 a share, and Morgan Stanley was up 2.3 percent, to $16.50 a share.