NEW YORK – Stocks fell Wednesday as investors, disappointed by the Federal Reserve's decision to cut interest rates by only a quarter of a percentage point, were also spooked by the U.S. central bank's announcement it was ready to cut the cost of borrowing even more.
The Dow Jones industrial average (search) fell 98.32 points, or 1.08 percent, to 9,011.53. The Standard & Poor's 500 Index (search) lost 8.14 points, or 0.83 percent, to 975.31, and the tech-laced Nasdaq Composite Index (search) lost 2.98 points, or 0.19 percent, at 1,602.63.
After the rate-setting Federal Open Market Committee (search) trimmed the bellwether federal funds rate to 1 percent, a low not seen since 1958, the Fed announced it was ready to cut the cost of borrowing even more if the risk of falling prices worsened, which some analysts said spooked some investors.
"Until we see margins increase and pricing power return ... I wouldn't be surprised if the market continued to sell off," said Diane Garnick, chief U.S. strategist at Dresdner Kleinwort Wasserstein. Fed chief Alan Greenspan had "told us explicitly not to worry about deflation but that's the number one concern that they're talking about today," she said.
The move brought the federal funds rate (search) charged on overnight loans between banks to 1 percent from 1.25 percent, the lowest level since 1958. The fed funds rate is the U.S. central bank's key tool for setting the nation's monetary policy and signals the direction it wishes business and consumer lending rates to follow.
"To do 25 when they could have taken out 50 and to say their concerns are still with the downside risks on inflation -- it doesn't seem they've taken out all the insurance they could have," said James Glassman, economist at J.P. Morgan Securities.
The major stock market gauges took a turn for the worse after the decision. Earlier they clung to modest gains, led by the Nasdaq as investors nibbled at technology stocks bruised in recent sessions.
Nextel Communications Inc. (NXTL), which was among the stocks listed as Lehman Brothers' "10 Uncommon Values," rose 41 cents to $16.95, or 2.48 percent.
Another bright spot was Freddie Mac (FRE). The No. 2 U.S. mortgage finance company rose 80 cents, or 1.6 percent, to $50.83 after it said it expects to restate earnings for 2000, 2001 and 2002 upward by as much $4.5 billion. Investors welcomed the clearer picture of the size of the restatement and management's move to fix the accounting mess.
Goldman Sachs Group. (GS) reported earnings rose by 23 percent. But its shares, which are up about 26 percent this year, fell $1.82 to $84.78, or 2.1 percent.
Carnival Corp. (CCL) fell $1.01, or 3.16 percent, to $31. The top cruise group reported a smaller profit and said earnings for the rest of the year would be lower than expected.
Wall Street got a mixed bag of economic news.
The government said sales of single-family homes rose 12.5 percent in May and realtors reported sales of existing homes rose 1.2 percent that month.
But the government also said orders for durable goods -- big-ticket items like cars -- slipped 0.3 percent in May. Economists had expected a 0.8 percent rise.
Paul Cherney of S&P MarketScope said the Fed move was what the market wanted. The real problem markets face is that companies don't want to take advantage of the lower rates to spend more and create jobs in an uncertain economy, he added.
"What the market will look for now is signs of earnings improvement in the July earnings season," Cherney said.
Volume was active with 1.44 billion shares traded on the New York Stock Exchange and 1.55 billion on Nasdaq. Gainers beat decliners by narrow margins on both markets.
The Russell 2000 index (search), a barometer of smaller company stocks, rose 2.33, or 0.5 percent, to 443.22.
Overseas, Japan's Nikkei stock average (search) finished 0.2 percent higher Wednesday. In Europe, France's CAC-40 rose 0.2 percent, Britain's FTSE 100 (search) gained 0.2 percent and Germany's DAX index fell 0.6 percent.
Reuters and the Associated Press contributed to this report.