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Stocks slip after Fed says interest rates will rise faster

Stocks slip after Fed says interest rates will rise faster
Tuesday's ruling in the AT&T-Time Warner trial sent ripples through the media and telecommunications industries Wednesday. (Richard Drew / Associated Press)

U.S. stocks slipped Wednesday after the Federal Reserve raised interest rates and said it expects to increase twice more by year’s end. Investors bet that several huge deals are more likely to happen after a federal court cleared AT&T's $85-billion purchase of Time Warner.

Wall Street was already certain the Fed would raise interest rates Wednesday. The central bank's decision makers also said they plan to raise rates two more times this year for a total of four increases. Investors had debated all year if rates would rise three or four times, and some are concerned that if rates rise that quickly, it could stifle economic growth because consumers and businesses will have to pay more to borrow money.

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The Fed's projections might have been unwelcome, but they weren't a shock: For months there have been signs the economy is getting stronger. Another came Wednesday, when the Labor Department said wholesale prices climbed at a faster pace in May. The Fed says inflation is likely to increase and projects that unemployment will hit a 50-year low in a few months, and it wants to keep inflation under control.

“There was nothing terribly surprising in the announcement,” said Jeremy Zirin, head of investment strategy for UBS' global wealth management business. He said the Fed's new forecasts “appeared largely to simply reflect the economic reality of the last two or three months.”

He added that the Fed didn't have a big change of heart either: Its projections changed because one additional policymaker forecast four rate increases instead of three.

The ruling in the AT&T-Time Warner trial sent ripples through the media and telecommunications industries. Shares of 21st Century Fox jumped as investors anticipated Comcast would offer to buy Fox's entertainment businesses. Comcast did so just after trading ended, announcing a $65-billion bid. The ruling also gave investors more confidence that two big takeovers in the healthcare field will now go through.

The Standard & Poor’s 500 index fell 11.22 points to 2,775.63 after it closed at a four-month high Tuesday. The Dow Jones industrial average fell 119.53 points to 25,201.20.

The Nasdaq composite slipped 8.09 points to 7,695.70. The Russell 2000 index of smaller-company stocks fell 5.76 points to 1,676.54 points. Both indexes finished at record highs Tuesday.

Judge Richard Leon said AT&T can buy Time Warner and rejected the government's argument that the deal would stifle competition and lead to higher cable bills. The purchase will give the wireless and cable giant control of CNN, HBO and the Warner Bros. movie studio. Time Warner shares climbed 1.8% to $97.95 while AT&T slid 6.2% to $32.22.

Media companies rallied. Netflix climbed 4.4% to $379.93, and CBS advanced 3.6% to $54.26.

Comcast had said it was preparing to make an offer for Fox's entertainment divisions, but was waiting for the judge's ruling. Fox jumped 7.7% to $43.66 on Wednesday and was little changed in late trading. Comcast slipped 0.2% to $32.32. Fox had agreed to sell those businesses to Disney for $52.4 billion in stock, setting up the possibility that Disney will have to raise its offer. However, Disney shares rose 1.9% to $106.31.

Investors now view CVS' effort to buy health insurer Aetna as more likely to go through, and they felt similarly about Cigna's offer for pharmacy benefits manager Express Scripts. T-Mobile USA and Sprint made smaller gains. Investors have been skeptical the government would allow the third- and fourth-largest wireless carriers to combine.

Erik Gordon, a professor at the University of Michigan's Ross School of Business, said the ruling is probably a good sign for the two healthcare deals because, like AT&T and Time Warner, those acquisitions won't reduce the number of companies competing in an industry, unlike a Sprint-T-Mobile merger. But investors might be drawing overly broad conclusions from Leon's ruling, Gordon said.

“The judge's decision is based on some very particular facts of the AT&T-Time Warner case,” he said, including the growing popularity of streaming services and greater competition for advertising revenue. “This isn't a case that's about a big sweeping legal philosophy.”

KB Home slid 7.3% to $26.26 on worries that housing sales could slow.

H&R Block dived 17.9% to $24.29 after the tax preparer said it plans price changes that will reduce its profit margins in the current fiscal year.

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Bond prices fell as investors expected interest rates to rise. The yield on the 10-year Treasury note rose to 2.97% from 2.96%.

The dollar rose to 110.55 yen from 110.33 yen. The euro rose to $1.1773 from $1.1750.

Benchmark U.S. crude rose 0.4% to $66.64 a barrel in New York. Brent crude, used to price international oils, climbed 1.1% to $76.74 a barrel. Wholesale gasoline jumped 1.7% to $2.13 a gallon. Heating oil rose 1.1% to $2.19 a gallon. Natural gas rose 0.8% to $2.97 per 1,000 cubic feet.

Gold edged up 0.1% to $1,301.30 an ounce. Silver rose 0.6% to $16.99 an ounce. Copper edged up 0.1% to $3.25 a pound.

In overseas markets, Germany's DAX rose 0.4%. France's CAC 40 and the FTSE 100 in Britain took tiny losses. The Nikkei 225 in Japan rose 0.4%. South Korea's Kospi fell less than 0.1%. Hong Kong's Hang Seng dropped 1.2%.

3:05 p.m.: This article was updated with closing prices, context and analyst comment.

12:15 p.m.: This article was updated after the Federal Reserve meeting.

This article was originally published at 8:15 a.m.

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