Financial markets showed a mixed response Tuesday to the Federal Reserve Board's decision to leave short-term interest rates alone, as long-term bond yields jumped, gold surged and stocks mostly shrugged.
In general, inflation jitters seemed to dominate, as some investors worried that the economy is strong enough to justify further braking via higher short rates.
That sentiment was most apparent in the bond market, where the yield on the 30-year Treasury bond surged to a new 27-month high of 7.86% immediately after the Fed's meeting adjourned, from 7.79% on Monday.
By the close of trading the T-bond yield inched down slightly, to 7.84%--still the highest since June 23, 1992.
In commodities trading, gold futures also responded quickly to the Fed's lack of action, with near-term futures leaping $3.70 to a 13-month high of $398 an ounce on the Comex.
Gold's strength came at the expense of the dollar, which was broadly lower. It closed in New York at 98.17 Japanese yen, down from 98.80 Monday, and at 1.543 German marks, down from 1.554.
"The movement in gold directed things," said David de Rosa, a director at Swiss Bank Corp. in New York. "The gold market reacted to the Fed as if there will be higher rates of inflation. Bonds headed for the hills and that took the dollar down."
Bonds and gold ignored a report that suggested possible economic weakness: The Conference Board reported its September consumer confidence index slipped to 88.4 from 90.4 in August.
In the stock market, the Dow Jones industrial average ended up 13.80 points at 3,863.04, but its strength was concentrated in stocks of commodity producers--which also pointed to expectations of higher inflation ahead.
Overall, losing stocks topped winners by 12 to 10 on the New York Stock Exchange in active trading, and broad market indexes were mixed. The Nasdaq composite index of mostly smaller stocks eased 0.26 point to 755.37.
The only major bright spot in the market was a sharp drop in short-term bond yields, which had surged last week, anticipating a Fed rate hike. The yield on three-month T-bills tumbled to 4.81% from 4.91% on Monday.
In a Treasury auction Tuesday, the government sold new two-year notes at a top yield of 6.55%, about as expected.
Most economists had correctly predicted the Fed would refrain from pushing up interest rates for the sixth time this year.
But the central bank's inaction doesn't rule out another rise in rates soon, said Michael Metz, analyst at Oppenheimer & Co.
"The non-news is out now. But the probability is we will have a move by the Fed in the next month or so," Metz said, as more economic data is analyzed.
Even so, Dennis Jarrett, chief market analyst at Kidder, Peabody, said he expects stocks to rally in the near term.
"I think at this point the gold market is overbought, Treasuries are oversold," Jarrett said. "I wouldn't be surprised to see a rally develop in the other direction--rally the bonds, sell the gold and get an equity bounce."
Among Tuesday's highlights:
* Commodity-related stocks rising strongly included International Paper, up 1 3/8 to 79; Alcoa, up 1 3/4 to 87 1/8; and Union Carbide, up 5/8 to 34 5/8. Investors may be assuming that the economy will continue to roll without higher interest rates, allowing commodity producers to push prices higher.
* Auto-related stocks also got a bounce. Ford surged 1 1/4 to 27 7/8, Chrysler added 1 3/8 to 45 1/4 and Goodyear leaped 1 to 33 1/8.
* Gold mining stocks got a boost from the rise in the metal. Newmont Mining gained 1 to 46 3/4, ASA shot up 1 3/4 to 53 3/4 and Santa Fe Pacific Gold added 1/2 to 17 7/8.
* Drug stocks surged, apparently helped by news that health care reform on Congress is dead for 1994. Merck jumped 1 1/8 to 36, Pfizer rocketed 1 3/8 to 69 3/8 and Johnson & Johnson leaped 2 1/8 to 51 1/4.
* Among new stock issues, Baby Superstores surged to close at 34 3/4 on heavy Nasdaq volume on its first day of trading. The stock's initial price was 18, and it hit a high of 38 during the session.
* Nynex jumped 2 to 38 and was among the most heavily traded NYSE issues. The regional telephone company submitted a plan to state regulators today to cut basic rates in New York while freezing other higher rates for seven years.
* On the down side, some technology issues continued to weaken. Intel eased 1/8 to 62 1/2, Compaq fell 3/4 to 33 3/8, Lotus lost 1 3/4 to 35 1/8 and Computer Associates was off 7/8 to 43 1/8.
* Among Southland issues, New Image Industries plunged 5 to 8 after Dentsply called off plans to buy New Image.
In the corporate bond market, prices of Greyhound bonds plummeted after the company said it would delay a $4.2-million interest payment. Greyhound Lines Inc. said it wanted time to develop a restructuring plan.
Overseas, Tokyo shares took a big hit in end-of-quarter trading, as the Nikkei index tumbled 345.47 points, or 1.7%, to 19,468.89, lowest in five months. European markets were mixed, while in Mexico City the Bolsa index lost 21.65 points to 2,818.43.
In other commodity trading, Comex silver futures for current delivery rose 9 cents to $5.71 per troy ounce, following gold higher.