Shares slide on fears of a hamstrung Fed

Stocks finished a rough week on the downside Friday after a jump in consumer inflation raised concerns about how much freedom the Federal Reserve has to continue cutting interest rates.

That helped bolster the dollar, however, because steady rates could keep foreigners interested in dollar-denominated bonds. The greenback soared against the euro and the yen.

In the Treasury bond market, long-term yields moved up for a second day.

Stocks fell at the opening bell and a midmorning rally soon gave way to more selling. Key indexes finished the session near their lows for the day as investors pulled away.

The Dow Jones industrial average sank 178.11 points, or 1.3%, to 13,339.85.

Among broader indexes, the Standard & Poor’s 500 dropped 20.46 points, or 1.4%, to 1,467.95, and the Nasdaq composite slumped 32.75 points, or 1.2%, to 2,635.74.

Losers swamped winners by more than 3 to 1 on the New York Stock Exchange.

Investors’ moods soured after the Labor Department said its consumer price index had a bigger-than-expected jump in November, with large increases in the cost of clothing, airline tickets and prescription drugs.

On Thursday the government reported a steep rise in its wholesale price index for November.

In both cases, high energy costs were a main culprit. But even excluding energy, the inflation picture was troubling, analysts said.

The price index data “are a sort of warning sign,” said William Larkin, fixed income portfolio manager with Cabot Money Management in Salem, Mass.

One issue is whether high energy costs will dim consumer spending, raising the risk of recession.

“The consumer is getting hit by higher energy prices, and given the state of the overall housing market, we’re expecting consumers to pull in their spending,” said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston.

Another issue is whether inflation pressures could keep the Fed from continuing to ease credit to help the economy.

“This data highlight the huge dilemma the Fed is facing between trying to quell the financial dislocations in the market, easing policy, and all the while inflation rates are starting to climb higher,” said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

Inflation-wary investors pushed up yields on Treasury securities. The two-year T-note yield jumped to 3.31% from 3.23% on Thursday, the highest since Nov. 16. The 10-year T-note yield ended at 4.24%, up from 4.20% on Thursday and also a one-month high.

Still, there was some good news from energy markets, where crude oil futures slipped 98 cents to $91.27 a barrel.

And another report on the economy was somewhat encouraging: The Fed said industrial production rose 0.3% in November.

But the sharp sell-off in stocks suggested growing investor caution about the economy, analysts said.

For the week, the Dow fell 2.1%, the S&P; 500 lost 2.4% and the Nasdaq index slid 2.6%.

Key indexes on Monday had reached their highest levels in at least a month, bouncing back from a plunge in November. But the Fed’s quarter-point rate cut Tuesday was less than many investor had hoped for and triggered another sell-off.

Investors also seemed unimpressed by a bank-lending plan the Fed unveiled Wednesday to help ease the credit crunch in the financial system.

Banking stocks slid further Friday. Bank of America fell 89 cents to $42.16 and JPMorgan was down 56 cents to $45.20.

Citigroup lost 31 cents to $30.70 after the bank announced late Thursday a plan to move $49 billion of assets from seven “structured investment vehicles” onto its books to help the SIVs repay their debts.

Bond insurance firms also sank. MBIA dropped $1.91 to $27.60.

In a sign of concern about the trend in consumer spending, restaurant stocks tumbled. Cheesecake Factory fell $1.14 to $22 and IHOP slid $2.20 to $42.26.

Amazon.com, the world’s largest Internet retailer, fell $3.32 to $89.08 and EBay, the biggest auction site, declined $1.39 to $32.70 after a research firm said online holiday sales were growing at the slowest pace ever.

The session did produce one clear winner: the dollar. It rose as traders bet the Fed won’t be able to reduce interest rates much more because of inflation pressures.

The euro sank to $1.443 from $1.462 on Thursday. The dollar rose to 113.42 yen from 112.20.

But the strong dollar is hurting U.S. investors’ returns on foreign stocks. The German stock market fell 0.6% this week in euros, but in dollars it was down 2.1%. The Japanese market fell 2.8% in yen and 4.1% in dollars.

Among emerging markets, Brazilian shares fell 4.9% for the week in local terms and 6.9% in dollars.