Investors show interest rate concerns

Stocks pulled back Tuesday, finishing slightly lower as investors grappled with an economic assessment by the Federal Reserve that warned yet again of inflation risks and reported a substantial slowing of the housing sector.

The statement, which accompanied the Fed’s widely expected decision to keep the nation’s benchmark interest rate unchanged at 5.25%, left open the possibility that the central bank might raise rates if inflation accelerates. That disappointed some investors who were hoping for signs that the Fed was moving toward cutting rates.

Investors fear that an increase in rates could cause problems if it comes as the economy -- in particular the interest rate-dependent housing sector -- is still slowing. The Fed’s statement described the housing market’s slowdown as substantial, a change from past statements.

Still, while the Fed has said its primary concern is inflation, it is also monitoring the overall economy for signs of too much of a slowdown. The Fed predicted, “the economy seems likely to expand at a moderate pace on balance over coming quarters.”

Overall, the statement indicated that the Fed wants to keep rates steady for as long they can, analysts said.

“They’re trying to talk tough in the hopes of not having to act tougher,” said Jack Caffrey, equities strategist at J.P. Morgan Private Bank.

The Dow Jones industrial average finished down 12.90 points, or 0.1%, at 12,315.58. Earlier in the day, it fell more than 76 points. Broader stock indicators also fell but closed above their lows as well. The Standard & Poor’s 500 index slipped 1.48 points, or 0.1%, to 1,411.56, and the Nasdaq composite index fell 11.26 points, or 0.5%, to 2,431.60.

Crude oil futures fell 20 cents a barrel to $61.02 in New York trading. Bond yields fell after the Fed meeting. The text of the statement released after the announcement was little changed from the one it released after its October meeting, expressing continued concerns about inflation. However, some interpreted the Fed’s addition of the word “substantial” to its characterization of the cooling in the housing market as a more significant acknowledgment of downside pressures to economic growth.

It also said recent economic indicators had been mixed.

“Minor changes were made, but the two changes that were made reflect an acknowledgment that things are a little bit slower than last time,” said Rick Klingman, head trader on the U.S. Treasury desk with ABN AMRO in New York.

Also Tuesday, the Commerce Department reported that the trade deficit fell to $58.9 billion in October, much lower than economists had anticipated.

The 8.4% drop from September, the biggest percentage decline in five years, was a result of moderating oil prices.

In other market highlights:

* Tepid profit at Best Buy signaled that demand for electronics may not boost holiday sales as much as anticipated. Best Buy’s third-quarter profit rose but came in below expectations as the electronics retailer lowered prices to move merchandise. It was a sign that demand during the peak shopping season might not meet investors’ hopes. Best Buy declined $2.62 to $51.30.

* Goldman Sachs, Wall Street’s largest investment bank, reported its fourth-quarter profit nearly doubled on merger-and-acquisition activity, the hot commodities market and soaring stocks. Goldman also said it was paying its employees an average of $622,000 this year, after posting the highest profit ever for a securities firm.

However, Goldman Sachs fell $1.56 to $200.97, as concerns arose that the investment firm’s performance may have peaked.

* The steel sector faltered after Nucor said it expected earnings for the upcoming quarter to fall below what analysts were forecasting. Shares of Nucor fell $4.75, or 7.4%, to $59.60.

* Citigroup fell 63 cents to $52.25 after it named Robert Druskin as its chief operating officer late Monday. The announcement was a letdown for some investors who had been hoping for a large-scale management overhaul.

* Apple Computer slid $2.61 to $86.14. The maker of the market-dominating iPod music player has seen monthly revenue at its iTunes music store drop 65% this year through June, according to a Forrester Research report.