STOCKS : Fed’s Failure to Move on Interest Rate Policy Drops Dow Jones 45.54

Stock prices fell sharply Tuesday, weakened by disappointment with the Federal Reserve’s interest rate policy as well as heavy bouts of computerized selling.

The Dow Jones average of 30 industrials fell 45.54 to 2,873.02, its sharpest point drop since March 19, when the widely watched index fell 62.13 points.

During intra-day trading, the average fell more than 50 points, triggering a New York Stock Exchange limitation on the computerized trading strategy. Known generally as program trading, the strategy is used by large brokerage houses and involves the sudden sale or purchase of enormous amounts of stocks.

Declining issues outnumbered advances by nearly 2 to 1 in nationwide trading of NYSE-listed stocks, with 1,043 down, 576 up and 477 unchanged.

Volume on the floor of the Big Board came to 169.94 million shares, against 138.59 million in the previous session.

Many stock analysts closely watched the Fed’s market activities for signs the central bank would ease interest rates. Economists have widely anticipated a cut in interest rates to stimulate the economy since last Friday’s release of the March unemployment report. It showed the nation’s jobless rate at 6.8%, the highest level in four years.

“It’s still a question of waiting around to see what the Fed is going to do,” said Hildegard Zagorski, vice president of Prudential Securities Co.

By noon, the Fed entered the government bond market but didn’t show any sign of easing credit. The Dow promptly headed downhill.

“There was no impetus to buy,” said Jack Solomon, a vice president at Bear, Stearns & Co. He suggested that traders were hedging in case Thursday’s producer price index report and Friday’s consumer price report show higher-than-expected inflation.

Many economists believe that the Fed is delaying an interest rate reduction until release of these key inflation reports.

Dennis Jarrett, chief market analyst for Kidder, Peabody & Co., predicted that the central bank could lose credibility “if the Fed doesn’t get its act together and decide what its course of action should be and reflect that to the investing public.”

Among the highlights:

* Market strategists also kept a close eye on the release of new earnings reports. Bank of New York Co. reported that it lost $63 million in the first quarter, contrasted with a profit of $102 million for the same period a year ago. The bank reported bad loans rose by $254 million in the quarter to $1.85 billion. Bank of New York’s stock slid 1 1/2 at 27 1/8.

* Among the blue chips, Boeing fell 1 1/8 at 47 3/4, Ford Motor rose 1/2 at 31 5/8 and International Business Machines dropped 1 3/4 at 111 1/4.

In London, the Financial Times-Stock Exchange index of 100 leading shares closed 2.7 points lower at 2,527.2.

In Frankfurt, Germany, the DAX index closed 2.16 points up at 1,582.11.

In Tokyo, the Nikkei average was down 290.26 points at 26,317.39.

Credit

Bond prices fell in light dealings after the Federal Reserve indicated that it wasn’t easing monetary policy.

The Treasury’s bellwether 30-year bond declined 15/32 point, or $4.69 per $1,000 in face amount. Its yield rose to 8.20% from 8.15% late Monday.

Traders sold bonds to take advantage of a recent run-up in prices. But activity was light as market participants avoided taking major positions before the release of inflation data later this week.

“There’s a great deal of interest in those reports, so until we get them the market is seemingly on hold,” said William V. Sullivan, an economist with Dean Witter Reynolds Inc.

The federal funds rate slipped late Tuesday to 4% from 5.50% late Monday. Analysts said that was probably due to more reserves in the system than believed and a lack of bidding by banks.

Currency

The dollar fell sharply on world currency markets as investors focused on interest rates.

The dollar fell in European trading. Traders said the decline was triggered by Germany’s Bundesbank, which notched up the interest rate on repurchase agreements to 8.6%, up 0.1%.

Traders fear that the central bank might be poised for further rate hikes in the coming weeks. Higher foreign interest rates are generally bearish for the dollar since investors who want to capture those returns must purchase foreign currencies to do so. In the process they would sell dollars.

In New York, the dollar settled at 134.85 Japanese yen, down from 136.96 yen on Monday. Other late dollar rates in New York, compared to late Monday’s rates, included: 1.6655 German marks, down from 1.6926; 1.4080 Swiss francs, down from 1.4362; 5.6360 French francs, down from 5.7255; 1,236.50 Italian lire, down from 1,256.00, and 1.1525 Canadian dollars, down from 1.1539.

Commodities

Widespread rain in the Midwest and forecasts for showers through next week triggered a fall in grain futures prices on expectations that the moisture will help produce bountiful crops.

Much-needed rain in wheat-growing regions depressed wheat prices as much as 4 cents a bushel. The May delivery dropped 3.75 cents to close at $2.81 1/2 a bushel.

Corn for May delivery fell 4 cents to $2.55 a bushel, and May soybeans declined 8.75 cents to close at $5.81 3/4.

On New York’s Commodity Exchange, gold futures advanced on prospects for an inflationary economy despite recession, analysts said.

Reports later this week on the size of the rise in consumer and producer prices in March were expected to bull the precious metals forward as investors seek out a hedge against inflation.

Gold for June delivery closed $3.20 higher at $367.20 an ounce, and May silver finished up 5.7 cents at $4.032 an ounce.