US stocks sink after Fed predicts slower growth

NEW YORK (AP) ? The Federal Reserve spoke ? and the financial markets responded with a dive.

Stocks dropped Tuesday afternoon immediately after the Fed said that economic growth this year has been “considerably slower” than it expected and that it will keep interest rates near their record low of almost zero until at least the middle of 2013.

Stocks had been rising throughout the day, and the S&P 500 was up as much as 2.9 percent in midday trading. After the Fed released its statement, the S&P 500 was down 1 percent, or 12 points, at 1,119 in afternoon trading.

The Dow Jones industrial average was down 176 points, or 1.6 percent, at 10,810. The Nasdaq composite index was down 16, or 0.7 percent, at 2,341.

The 10-year Treasury note rose, sending its yield down to 2.27 percent, a low for the year. It had reached a low of 2.34 percent on Monday. A bond’s yield drops when its price rises.

The Fed also said that it expects “a somewhat slower pace of recovery over coming quarters”

Oil prices sank $2.03 per barrel to $79.29 within minutes after the statement was released. Gold, considered a safe haven when other investments are tumultuous, rose again to $1,773.60 per ounce, up from its $1,713.20 closing price on Monday.

Boosting the stock market isn’t one of the Fed’s jobs, but that hasn’t stopped investors from parsing every word of the statements made by the Fed and its chairman, Ben Bernanke.

The Fed’s mandate is to keep prices stable and promote low unemployment, not boost stocks. But a stock dive after Fed comments has happened before. On June 3, the stock market suffered a late-day dive when Bernanke spoke in public at a conference. Investors said they were looking for a hint of new plans to spur economic growth. When that didn’t come, all three major indexes sank.

After Bernanke outlined the plan for a second round of quantitative easing in August 2010, the S&P 500 index gained 28 percent over eight months. Investors pointed to that rebound as evidence that quantitative easing worked ? and so did Bernanke. This sentiment led some people to believe that if stocks fall too far, the Fed would come to the rescue.

Investors have been worried about the first-ever downgrade to the U.S. credit rating by Standard & Poor’s, the slowing U.S. economy, debt problems in Europe and rising inflation in less-developed countries.

Economists believe there is a greater chance of a U.S. recession because the economy grew much more slowly in the first half of 2011 than previously thought. The economy grew at its slowest pace in the first half of 2011 since the recession ended in June 2009.

The manufacturing and services industries barely grew in July. The unemployment rate remains above 9 percent, despite 154,000 jobs added in the private sector in July.

Economies across the globe are also struggling.

Worries are growing that Spain or Italy could become the next European country to be unable to repay its debt. Another concern: high inflation in less-developed countries, which have been the world’s main economic engine through the recovery. China’s inflation rose to a 37-month high in July.

Concerns about the global economy have pulled attention away from stronger corporate earnings this spring.

Dish Network Corp.’s second-quarter net income rose 30 percent to $334.8 million on stronger revenue.

The housing market, though, remains weak. Homebuilder Beazer Homes USA Inc. said its loss widened last quarter after it closed on fewer homes.

Among the 441 companies in the S&P 500 index that have already reported their second-quarter earnings, profits are up 12 percent from a year ago.


AP Business Writer Matthew Craft contributed to this report.