Dow Tumbles 28 as Fed Hikes Discount Rate to 2-Year High

The stock market fell sharply Tuesday after a discount rate hike by the Federal Reserve caught investors off guard, sparking fears that interest rates may be headed even higher.

The Dow Jones index of 30 industrials, which had been off nearly 40 points, closed down 28.27 at 2,079.13, its fourth consecutive losing session.

Declining issues outnumbered advances by about 7 to 2 in nationwide trading of the New York Stock Exchange while volume on the Big Board soared to 200.71 million shares, up from Monday’s 148.80 million.

Stock prices opened slightly lower but headed further south shortly after the opening when the Fed raised the fee its 12 district banks charge member banks for short-term loans a half point to 6.5%, bringing the rate to its highest level in more than two years.

While the market’s initial reaction was negative, some analysts said the Federal Reserve’s stand against inflation looms as a long-term positive for the market.

An increase in the discount rate is the central bank’s most direct way of pushing interest rates higher to curb economic growth. Economists said jumps in other interest rates, including those on mortgage rates and credit cards, are likely to follow.

Some investors regarded the news on interest rates as positive, reasoning that with the economy growing strongly and inflation picking up, a dash of tighter credit could keep the economy from overheating.

“The discount rate hike represents a determined attack against inflation,” said Monte Gordon, director of research at the Dreyfus Corp.

After the shock wears off, investors may find the Fed’s decision supportive to stocks because it indicates that the Fed is willing to take aggressive moves to keep the economy growing at a sustainable pace.

“The feeling is that the sooner the medicine is administered, the quicker the patient will recover,” said Michael Metz, vice president and technical analyst at Oppenheimer & Co.

“The question is what comes next: Is this enough or are we in for a period of extended tightening?” Metz asked.

With the dollar up sharply on the Fed’s announcement, some analysts said stocks and bonds could be in line for a boost as foreign funds shift into dollar-denominated investments.

But others feared that much more will be needed to keep the economy in line. Concern that the Fed “is going to have to tighten the screw another notch” gave most investors the jitters, said Hugh Johnson, a senior vice president at First Albany Corp.

“The market is still looking for direction and is locked in gridlock between higher interest rates and strong economic numbers,” Johnson said, adding that what results is a trendless trading pattern.

While analysts had expected the Fed to tighten its reins on the money supply this week, few expected the change would come in the discount rate.

Money-center bank issues fell in response to the discount rate news, which will increase their borrowing costs. Among them, Citicorp fell 1/2 to 24 5/8; Chase Manhattan was off 3/8 at 29 7/8; Manufacturers Hanover was down 5/8 at 29 1/2, and J. P. Morgan fell 1 to 36 1/2.

Among actively traded Big Board issues, Houston Industries fell to 31 3/4 with more than 51 million shares changing hands as traders moved to capture the company’s dividend.

Upjohn jumped 1 3/4 to 33. The company said it received an “approvable” letter from the Food and Drug Administration for its Rogaine treatment for male baldness.

Elsewhere, IBM fell 1 1/2 to 121 5/8; Ford Motor fell 1 1/8 to 51 7/8, and USX was off 7/8 at 29 3/8.

The Wilshire index of 5,000 equities closed down 31.759 at 2,657.734.

The NYSE index was down 1.86 at 150.66.

Standard & Poor’s index of 400 industrials fell 4.07 to 306.86, and S&P;’s 500-stock composite index was off 3.49 at 266.49.

At the American Stock Exchange, the market value index fell 3.11 to 301.12. The NASDAQ composite index for the over-the-counter market closed at 384.23, off 3.43.

Stock prices also closed lower in Tokyo and London. On the Tokyo Stock Exchange, the Nikkei 225-share index fell 82.76 points to 28,170.36. In London, the Financial Times 100-share index fell 13.4 points to 1,862.6.

Related story, Part I, Page 1.