Wall Street gave up sharp gains and closed lower Wednesday after the Federal Reserve cut an interest rate by a quarter of a point but left investors guessing about the central bank's next move.
The Dow Jones industrial average, momentarily soaring above 13,000 for the first time since early January, ended the session with a modest loss.
In a statement, the Fed made it clear the central bank was less worried about economic growth than in March, when it pointed to "downside risks to growth."
The Fed said Wednesday that while the economy remained weak and the inflation outlook was still uncertain, its rate cuts and lending efforts over the past several months "should help to promote moderate growth over time and to mitigate risks to economic activity."
But what was less certain was whether the central bank was confident enough about the economy to make inflation a top priority and keep interest rates on hold.
"It feels as if they're going to pause," said Kim Caughey, equity research analyst at Fort Pitt Capital Group. But she said she was surprised the Fed stated that it "expects inflation to moderate in the coming quarters."
"I think they're being clear that they're not 100% sure about what the next step is," Caughey said.
With economic data in recent weeks coming in anemic, but not as bad as expected, inflation has appeared to Wall Street to be the growing threat because of rising food prices, crude oil near $120 a barrel and U.S. gasoline prices surging to an average of more than $3.60 a gallon.
"The market had wanted to hear tougher talk on inflation, and some sort of talk that the easing has been adequate for a while, for the foreseeable future," said Scott Wren, equity strategist for Wachovia Securities.
The Dow Jones industrial average fell 11.81, or 0.09%, to 12,820.13, after trading up 178 points shortly after the Fed's announcement it was lowering the federal funds rate to 2%.
Broader stock indicators also closed down, having given up steep gains. The Standard & Poor's 500 index fell 5.35, or 0.38%, to 1,385.59, and the Nasdaq composite index fell 13.30, or 0.55%, to 2,412.80.
The benchmark 10-year Treasury note rose after the Fed's decision. Its yield, which moves opposite its price, fell to 3.73% from 3.82% late Tuesday.
The dollar dropped against most other major currencies, but the euro gained 0.008 to $1.564 against the dollar. Gold prices fell $11.40 to $862.80.
Crude oil fell $2.17 to settle at $113.46 a barrel. .
Stocks had rallied in the hours before the Fed decision thanks to stronger-than-anticipated economic and corporate reports, a weeks-long trend that has helped the three major indexes post their first monthly gains after five straight months of losses.
The Dow climbed 4.54% for April, the S&P; rose 4.75% and the Nasdaq jumped 5.9%. The Dow, however, remains down 3.35% for the year, while the S&P; is down 5.64% and the Nasdaq is down 9.03%.
The Commerce Department estimated Wednesday that the gross domestic product rose at a modest seasonally adjusted annual rate of 0.6% during the first quarter, while the Chicago purchasing managers' index showed another month of contraction in Midwest manufacturing.
However, many economists had forecast a lower rise in first-quarter GDP and some had even predicted a contraction. On average, they had anticipated a reading of 48.0 for the April purchasing managers' index instead of the reported 48.2.
Another report that beat lowered expectations came from General Motors, whose quarterly loss of $3.3 billion because of a supplier strike and weak U.S. sales was milder than Wall Street predicted. Shares of the Dow component jumped $2, or 9.4%, to $23.20.
Procter & Gamble, another Dow component, said price increases and cost controls helped offset higher commodity costs, pushing its third-quarter profit up 8%. P&G; lifted its full-year outlook, and its shares rose $1.15 to $67.05.
But the technology sector got extra downward pressure after German software maker SAP said its profit slipped in the first quarter because of the weaker dollar and its takeover of another software company, Business Objects. Though sales were higher and SAP raised its 2008 outlook, shares fell $2.22, or 4.2%, to $50.23.
Meanwhile, Dow component Citigroup priced $4.5 billion of common stock to sell to boost its cash levels. Citigroup shares fell $1.05, or 4%, to $25.27.
The Russell 2000 index of smaller companies fell 2.75, or 0.38%, to 716.18.
Advancing issues outnumbered decliners by about 8 to 7 on the New York Stock Exchange.
Overseas, Japan's Nikkei stock average fell 0.32%. Britain's FTSE 100 closed down 0.03%, Germany's DAX index rose 0.92% and France's CAC-40 rose 0.39%.