Wall Street Falls as Fed Auctions $20B
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Wall Street extended last week’s losses today as investors remained concerned about flagging growth and rising prices, and were skeptical that a special Federal Reserve credit auction will be a solution.
The Dow Jones industrial average fell more than 170 points and all the major indexes lost at least 1%.
Investors remained nervous even as the Fed offered $20 billion in 28-day credit through an auction today. The central bank will not release the results until Wednesday, but the aim of the auction is to encourage commercial banks to borrow from the Fed. That, in turn, is designed to boost banks’ lending to businesses and consumers and keep the economy humming.
Last week, the Fed disappointed investors when it cut interest rates by only a quarter of a percentage point, which was less than some analysts expected. Wall Street is pleased that policy makers say they will keep trying to lift market confidence, which has dwindled since home foreclosures started soaring, but the market is so far unconvinced that the auction will be enough.
A speech last night by a former Fed chairman, Alan Greenspan, added to the market’s ill humor. Mr. Greenspan said “stagflation” — when inflation accelerates and the economy weakens — is a growing possibility, given last week’s data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, might feel less inclined to lower rates again.
Higher inflation is also a problem for consumers, especially during the holiday season. With only a week left until Christmas, sales data have suggested tepid spending by Americans, who are struggling with higher food and energy costs and tumbling home values.
“The consumer is two-thirds of our economy. The consumer holds the key to whether we have a recession in 2008,” a chief market strategist at A.G. Edwards & Sons Inc. in St. Louis, Alfred Goldman, said.
The Dow fell 172.65, or 1.29%, to 13,167.20, finishing near its low of the session.
Broader stock indicators also declined. The Standard & Poor’s 500 index dropped 22.05, or 1.50%, to 1,445.90, and the Nasdaq composite index fell 61.28, or 2.32%, to 2,574.46.
