Stocks down while markets wait on Fed

Stock prices fell moderately Monday as investors anxiously awaited the Federal Reserve’s expected decision today on interest rates.

Volume on the New York Stock Exchange was among its lightest levels of the year, indicating that many market participants were staying on the sidelines before the Fed’s decision.

The market is betting on a rate cut when the Fed meets today, but investors aren’t sure how big the cut will be and what the central bank will say in its accompanying economic statement.

Talk from former Fed Chairman Alan Greenspan of the possibility of a recession amid high inflationary pressures also elevated Wall Street’s jitters, as did job cuts by Merrill Lynch at its sub-prime mortgage unit.

It’s possible the Fed won’t go through with a rate cut at all if it believes the economy is still growing moderately and that inflation remains a threat, but most investors expect the Fed to cut the benchmark federal funds rate, now at 5.25%, by at least a quarter-point.

And because negative economic data have trickled in over the last couple of weeks -- including a drop in the number of U.S. jobs in August and weaker-than-expected retail sales -- some analysts anticipate a half-point rate cut.

“A quarter-point is going to be disappointing. It’s already priced in,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.

But the Fed probably won’t want to lower rates by more than that, he said, and the central bank might not indicate in its statement that more reductions are in the offing.

“The big issue is gold and oil have been spiking higher, which people could argue is inflationary, but economic data has been weak,” Detrick said. “The Fed’s in a tough place.”

Higher interest rates prevent costs from rising; lower rates fuel growth but also tend to accelerate inflation.

The Dow Jones industrial average fell 39.10 points, or 0.3%, to 13,403.42.

Broader stock indicators showed steeper losses. The Standard & Poor’s 500 index slid 7.60 points, or 0.5%, to 1,476.65, and the Nasdaq composite index lost 20.52 points, or 0.79%, to close at 2,581.66. The Russell 2,000 index, which tracks small company stocks, fell 7.68 points, or 1%, to 775.81.

Treasury bond yields moved little. The 10-year Treasury note finished at 4.46%, unchanged from late Friday.

Declining issues outnumbered advancers by more than 2 to 1 on the NYSE.

Last week, stocks saw sizable gains, largely on high expectations of a rate cut. The Dow ended up 2.5%, the Standard & Poor’s 500 index rose 2.1%, and the Nasdaq composite index rose 1.4%. The Dow is just 4% below its all-time high of 14,000.41, reached in July before fears escalated about bad home loans and tight credit markets.

The dollar was mixed Monday against other major currencies while gold jumped $6.20 to a 16-month high of $715.80 an ounce.

Oil futures, which closed over $80 a barrel for the first time last week, rose as high as $80.70 on the New York Mercantile Exchange on Monday before closing up $1.47 at a record $80.57.

In other market highlights:

Shares of major investment banks lost ground. Bear Stearns, Lehman Bros., Morgan Stanley and Goldman Sachs Group are expected to release their fiscal third-quarter results this week. Bear Stearns fell $1.81, or 1.5%, to $115.38; Lehman fell 88 cents, or 1.5%, to $58.62; Morgan Stanley fell $1.20, or 1.8%, to $64.91; and Goldman fell $2.98, or 1.6%, to $187.61.

Merrill fell $1.80, or 2.4%, to $72.85, after saying it was eliminating an undisclosed number of jobs.

PHH tumbled $4.26, or 15%, to $24.24 after the operator of mortgage-lending and fleet-management units said its pending acquisition by General Electric might be hitting a financing snag.

Defense contractor EDO surged $3.33, or 6.5%, to $54.84 after ITT agreed to buy EDO for $56 a share in cash, or $1.19 billion.

Microsoft lost 32 cents, or 1.1%, to close at $28.73 after losing its appeal of a European antitrust order forcing it to pay a record $613-million fine, share software code with rivals and sell a copy of Windows without Media Player.

InfoSpace soared $4.13, 31%, to $17.38. Idearc, a publisher of online and paper directories, said it was paying $225 million in cash to buy Switchboard.com and other online directory assets from InfoSpace. Idearc fell 50 cents, or 1.5%, to $32.85.

Amgen fell 86 cents, or 1.5%, to $55.46. A Citigroup analyst said that sales of Aranesp, an Amgen anemia drug, could decline after federal reimbursement changes but that expense cuts would offset the loss.

Overseas, key stock indexes fell 1.7% in Britain, 0.2% in Germany, 1.8% in France and 1.2% in Hong Kong. Shares in Shanghai rose 2.1% to a record, while Japanese markets were closed for a holiday.