Dow Falls 41 After Fed Rate Hike; Bond Yields Hit 15-Month High : Markets: Central bank’s third increase this year triggers wave of sellling but no panic. Bond traders fear more hikes are in store.
Blue chip stocks plunged Monday after the Federal Reserve Board announced it was raising interest rates for the third time this year.
The Dow Jones industrial average fell 41.05 points to close at 3,620.42.
Meanwhile, Treasury bond yields soared to their highest level since just before President Clinton’s inauguration. The yield on the main 30-year bond rose to 7.42% from 7.28% on Friday. It was the highest the yield had finished since it stood at 7.47% in mid-January, 1993.
The Dow lost nearly 50 points early in the session, after the inflation-wary Fed announced the rate hike.
In the broader market, declining issues outnumbered advancing ones 1,648 to 625 in moderate trading of more than 271 million shares on the New York Stock Exchange.
News that the short-term rate was rising by 25 basis points to a new goal of 3.75% triggered a wave of selling and the jump in long-term bond interest rates because attention was focused on inflation, analysts said.
“I was somewhat surprised,” said A.C. Moore, analyst at SBCM/Argus. “I thought the Fed had come far enough and fast enough, given the need to combat potential inflation.”
Wall Street has been hit by a series of 25-basis-point hikes in interest rates this year. The most devastating increase for the stock market was the first one, on Feb. 4, which sent the Dow down nearly 100 points. That was the first rate hike in five years.
The Fed also raised short-term rates on March 22, again driving the blue chip index sharply lower.
The bond market is upset because “we still have the specter of more increases,” said Philip Orlando, equity portfolio manager at First Capital Advisors.
The long bond’s price fell 1 7/16 point, or $14.38 per $1,000 in face value.
Stocks Interest rates on short-term Treasury securities rose in Monday’s auction to their highest levels in more than two years. The Treasury Department sold $11.8 billion in three-month bills at an average discount rate of 3.76%, up from 3.63% last week. A further $11.8 billion worth was sold in six-month bills at an average discount rate of 4.21%, up from 4.03%.
The Fed’s increasing short-term rates mean speculators and others who had bought bonds with borrowed money would have to pay more to hold the securities. That reality encouraged selling, said William Sullivan, director of money-market research at Dean Witter, Discover & Co.
The rise in long-term interest rates also shows doubt in the market that the Fed’s action will stave off inflation.
“There’s an attitude that what the Fed has done so far in 1994 is not enough to break the economy’s momentum,” Sullivan said. “These modest moves are perceived as insufficient medicine.”
The Dow had been up more than six points before the Fed announced its intention to tighten credit.
“The market got crushed pretty quickly on the Fed news, and mounted one or two attempts at a rally, but never really made it,” said George Pirrone, senior trader at Dreyfus Corp.
Traders said the selling did not reach panic levels. They noted moderate volume and the market’s stability once it hit the session’s lows, around 3,613 on the Dow.
“I think a lot of people have resigned themselves to riding it out,” said Guy Truicko, equity portfolio manager at Unity Management. The market “really hasn’t gotten hit as bad as I thought it would.”
Among the trading highlights:
* General Electric dropped 1 7/8 to 94 7/8 after its Kidder, Peabody unit said it had fired the head of its government trading desk since the firm uncovered a scheme of phantom trades and profits.
* Merrill Lynch rose 1 to 36 1/4 after reporting earnings exceeding Wall Street expectations.
* Digital Equipment dropped 1 7/8 to 21 1/8 after losing 5 7/8 on Friday following its report of a third-quarter loss that was far worse that analysts had expected.
* Chase Manhattan ended 5/8 higher, at 34 3/8, on better-than-expected first-quarter earnings.
* Platinum Software shrank 6 7/16 to 3-9/16. Its top management resigned after news that third-quarter revenues would be less than expected, and results for at least the previous four quarters would be restated.
In foreign trading, Mexican stocks fell to a five-month low following a rise in the U.S. federal funds rate, traders said. The key IPC index lost 61.02 points, or 2.78%, to 2,137.62.
In London, the Financial Times-Stock Exchange 100-share index closed down 30.1 at 3,138.2. In Frankfurt, the 30-share DAX index closed 1.29% higher, bolstered by heavy interest in cyclical, automotive and auto supplier stocks. The DAX 30 index ended at 2,228.78, up 28.36 points. In Tokyo, the Nikkei average ended up 112.73 points to 20,277.36.
In other markets:
* The dollar fell against major foreign currencies after the Federal Reserve surprised the markets by raising short-term rates. In New York, the dollar fell to 103.15 yen from 103.45 yen on Friday. The British pound closed at $1.4765, up from $1.4715 on Friday.
* On the Commodity Exchange in New York, April gold dropped 90 cents to $376.80 an ounce.
* In energy trading on the New York Mercantile Exchange, light, sweet crude oil for May delivery rose 7 cents to $16.65 a barrel.
* Corn futures prices dropped to a 5 1/2-month low Monday on the Chicago Board of Trade as warm, dry weather in the Midwest created ideal planting conditions.
Other grain and soybean futures ended mixed, with most wheat futures rising with the news that China would bid for U.S. wheat.
Corn futures fell by 2 3/4 cents to 6 cents, with the contract for May delivery down 3 1/4 cents at $2.61 3/4 a bushel.
