Investors Signal Dismay Over Fed ‘Bias’; Bond Yields Jump

The Federal Reserve won no new friends on Wall Street on Tuesday with the decision to leave short-term interest rates unchanged: Stocks fell and bond yields jumped on worries that the central bank signaled it still may not be finished tightening credit.

The Dow Jones industrials were up more than 100 points before the Fed’s announcement, then tumbled 232 points before recovering to close nearly unchanged, off 0.64 point at 10,400.59.

In the bond market Treasury yields surged, with the 30-year T-bond ending at 6.17%, up from 6.09% on Monday and the highest since mid-August. Shorter-term yields also rose.

The Fed, in its official statement, said that although it left its benchmark short-term rate unchanged at 5.25%, it adopted a “bias” toward a “possible firming of policy”--in other words, higher rates.

Even though the central bank took pains to add that such a bias doesn’t necessarily imply any “near-term action,” investors weren’t happy.

T-bond futures fell to their lows of the year even though the yield on the actual 30-year bond remains below its 1999 high of 6.28% on Aug. 12. The futures’ sell-off could mean higher yields today on the bonds, said Marilyn Cohen of Envision Capital Management in Los Angeles.

“Investors were left with only one conclusion to draw about the Fed’s next move: It’s a tightening,” said Vic Thompson, a money manager at State Street Global Advisors in Boston.

Stocks had rallied Monday amid expectations the Fed would leave rates unchanged, but the Fed’s bias shift was apparently unforeseen by many investors.

“Now we’re worrying about the next Fed meeting” on Nov. 16, said Larry Rice, chief investment officer at Josephthal & Co. That could keep many investors from caring about much else between now and then, analysts said.

Indeed, with stocks already down sharply from their summer highs, many analysts say any hopes for a fast recovery have been crushed.

“The Fed would like to lower [economic-growth] expectations by talking them down,” said Christine Callies, chief investment officer at CS First Boston. “But consumers continue to spend,” she said. “Subtlety doesn’t work.”

If the stock market heeds the bond market’s message that growth is still too strong, stocks could be vulnerable to a further fall, Callies said. “Chasing small rallies at this point would not be constructive,” she warned.

Still, some experts were less pessimistic. The 232-point Dow dive Tuesday after the Fed’s announcement “was an overreaction,” said John Peluso, head of listed stock trading for Lehman Bros. The Dow then recovered, he said, because, “at the end of the day, people feel they can live with a tightening bias.”

Nonetheless, in the broad market falling stocks outnumbered winners by 3 to 2 on the New York Stock Exchange in heavy trading.

Most market indexes fell modestly. The Nasdaq composite, however, inched up 3.70 points to 2,799.67 as some technology and Internet stocks rallied. Apple rose $3.38 to $67.94 and America Online gained $4.38 to $113.50.

In currency trading the dollar edged up to 106.41 yen in New York on news of the Fed’s decision. Some economists believe one of the Fed’s goals with its statement Tuesday is to strengthen the dollar by keeping bond yields up--making them more appealing to foreign investors.

In commodity markets, gold rose to a two-year high as speculators labored to get out of bets on lower prices. Near-term futures surged $8 to $324.40 an ounce in New York.

Gold’s rally was sparked last week by European central banks, which pledged to limit lending and sales of gold for five years.

Speculators had collectively made massive bets on lower prices, based in part on expectations for continued central bank sales. Now those speculators are struggling to buy gold to close out their bets.

Meanwhile, crude oil fell to its lowest price in a month on speculation that Venezuela will push for an easing of OPEC production limits when its minister meets next month with Saudi Arabia and Mexico.

Crude oil for November fell 31 cents to $23.45 a barrel on the New York Mercantile Exchange.

“Any hint of an increase in production just knocks the market off its blocks,” said John Kilduff, senior vice president of energy risk management at Fimat USA Inc.

Oil’s decline dragged Exxon down $1.63 to $73, Chevron down $1.44 to $84.56 and Texaco down $2.50 to $60.44.

Market Roundup, C10

*

* NO RATE HIKE FOR NOW

Behind the Fed’s reasoning on interest rates. A1