Markets fall after Fed leaves interest rates unchanged

Stocks drop after the Federal Reserve announces that it will leave interest rates unchanged and that the U.S. economy is slowing at a moderate pace.

3 min read
Stocks fell Tuesday after the Federal Reserve announced that it will leave interest rates unchanged and that the U.S. economy is slowing at a moderate pace.

The Nasdaq rose as much as 72 points earlier in the day, while the Dow was up 139 before the announcement on hopes that the Fed might cut rates.

In afternoon trading, the Nasdaq composite index traded up 6.91 at 2,631.43, and the Standard & Poor's 500 index climbed 11.87 to 1,334.61. The Dow Jones industrial average rose 87.30 to 10,732.72.

The members of the Federal Open Market Committee (FOMC), the group that sets monetary policy for the Federal Reserve, decided in a meeting Tuesday to leave interest rates unchanged. The FOMC reversed its so-called bias, or outlook on future economic conditions, to a more benign stance toward inflation.

The Fed, which is scheduled to meet again in January, has raised rates six times since June 1999 for a total increase of 1.75 percentage points. Since the last rate movement, an aggressive half-point increase on May 16, the Fed has decided to leave rates alone during its past five meetings.

The Fed determined that interest rates would remain unchanged because inflation is in check, and the economy, which was once in jeopardy of overheating, is on a cooling trend. That's a retreat from its previous meeting, when it said the risks pointed mostly toward accelerating inflation.

"The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further," the Fed wrote.

Wall Street was hoping for a rate reduction, which generally sparks new investments and boosts stocks. High interest rates have eaten into corporate profits and hampered stock prices.

"There are some stocks that are rebounding nicely," said Kathy Taylor, a vice president and assistant manager of Nasdaq trading at A.G. Edwards. "But from our perspective, it appears people are still waiting on the sidelines."

The CNET tech index rose 26 to 2,192.94. Advancers led decliners, with 63 of the 97 stocks in the index rising, 33 falling and one remaining unchanged.

Of the 18 sectors tracked by CNET Investor, semiconductor equipment makers were the day's largest gainers, climbing 4 percent. Internet e-tailers posted the sharpest drops, falling nearly 3 percent.

The Philadelphia semiconductor index rose 21.53, or about 4 percent, to 603.68, led by chipmaker National Semiconductor, which rose $1.94, or about 10 percent, to $22.31.

Among the large tech companies, Cisco Systems climbed 81 cents to $43.75; Sun Microsystems gained 56 cents to $29.13; and Intel rose $1.25 to $34.50.

Microsoft fell $1.63 to $46.19, and Dell Computer dipped 56 cents to $18.94. Some industry watchers believe the PC maker has struggled to keep up with demand this holiday season.

Solectron rose $4.74, or almost 18 percent, to $31.46. On Monday, the world's biggest contract manufacturer for electronics topped analyst estimates for its fiscal first quarter by 3 cents. Excluding acquisition-related and one-time charges, the company earned $190.6 million, or 31 cents per share, on sales of $5.7 billion. Analysts polled by First Call/Thomson Financial expected the company to earn 28 cents.

Optical equipment maker Ciena on Tuesday said it has agreed to buy privately held Cyras Systems in a stock deal valued around $2.6 billion. Ciena hopes the acquisition will help extend its reach to metropolitan and other large customer networks that service large cities. Shares of Ciena fell $18.50, or 19 percent, to $77.88.

SBC Communications fell $6.63, or 12 percent, to $46.69. The telecom company said Tuesday it expects earnings growth in 2001 and fourth-quarter earnings per share to be at the lower end of expectations.

Siebel Systems fell $7.13, or 9 percent, to $71.25 after Credit Suisse First Boston analyst Brent Thill said domestic sales growth at the software maker will slow.

Siebel "remains the gorilla within the (customer management software) market. But the growth in core U.S. enterprise accounts is moderating more than most expect," Thill wrote in a research report. He continues to rate the company at "strong buy."