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Markets nudge upward after Fed leaves rates unchanged

For now investors are content--if lackadaisical--as the economy remains tough to call and short-term rate hikes seem unlikely.

U.S. markets budged ever so slightly Tuesday, after the Federal Reserve left interest rates unchanged.

The Nasdaq rose 5.06 to 3,958.21, and the Standard & Poor's 500 index dropped 1.35 to 1,498.13.

The Dow Jones industrial average rose 59.34 to close at 11,139.15, led by Honeywell International, which rose $1.63 to $38.63.

At the end of regular trading, Intel closed up 6 cents at $72.13. Microsoft climbed 63 cents to $71.25.

The Federal Reserve decided today to maintain interest rates, a move that most economists and investors had been anticipating for weeks.

The Fed's policy-making committee issued a brief statement that it would leave the federal funds rate at 6.5 percent. In the past 14 months, the Fed has increased the rate six times.

In a brief statement, the Fed noted that advances in productivity have allowed the economy to grow while "containing costs and holding down underlying price pressures."

"The Fed did exactly what we expected them to do," said Greg Mount, a senior economist at Bank One. "They highlighted (in their statement) exactly what we thought they would highlight, such as their concern over tightening labor markets and their expectation that economic growth will slow."

Recent economic data suggests a slowing economy, controlled consumer spending and little sign of increasing inflation pressures. An interest-rate hike typically pushes the stock markets downward because it saps consumer spending.

An interest-rate hike increases the cost for banks to borrow money from the government. Banks then raise their lending rates for loans to businesses and consumers, causing credit card debt and loans for homes and automobiles to become more expensive.

The overall effect decreases consumer spending, which accounts for about two-thirds of the U.S. economy. If spending decreases, so does the demand for goods, which keeps inflation under control.

Although short-term rate hikes seem unlikely, the jury is still out on whether the Fed has finished increasing interest rates in the longer term.

Economic data that is used to determine whether to increase rates has been inconclusive and sometimes conflicting. Some studies, including consumer spending, show that the economy is cooling off. Other information, like a gross domestic product of 5.20 percent in the first quarter of this year, imply that the economy is red hot.

"It's difficult to be precise right now," said Peter Kretzmer, an economist at Banc of America Securities, partly because economists still have to sift through reams of data that will come out before the next Fed meeting, scheduled for Oct. 2, to determine if the economy is slowing.

"The Fed will be on hold until the data distinctly show a bounce back in consumer spending or a worsening in inflation," said Kretzmer. Bank One?s Mount agreed. "They are waiting to move on a smoking gun, which has not yet appeared," he said.

The CNET tech index inched up 2.38 to close at 3,236.21. Winners handily whacked losers, with 57 of the 97 stocks in the index rising, 35 falling and five remaining unchanged.

Of the 18 sectors tracked by CNET Investor, computer-equipment distributors posted the biggest jumps, gaining about 1 percent. Providers of communication services were the day's largest losers, falling about 3 percent.

DSL.net was the largest percentage gainer on the Nasdaq after the company announced that IBM will sell DSL's high-speed Internet-access services to small businesses. The shares jumped $3.09, or 99 percent, to $6.22 on a volume of 19.4 million shares, more than 31 times the stock's average daily volume of about 622,000.

Among members of the CNET tech index, online trading site Ameritrade Holding rose $1.13, or 7 percent, to $17.06 on rumors that the company might be bought. DoubleClick, an Internet advertiser, also rose $2 to $32.19.

Losers in the tech index included ADC Telecommunications, which fell $2.88 to $39.19. VoiceStream Wireless also fell $5.63 to $108, and Tellabs dropped $3 to $54.94.

MP3.com rose $1.59, or about 21 percent, to $9.34 after the Internet music Web site settled a copyright suit with Sony.

On the downside, Internet consulting firm Scient fell $6.63, or about 15 percent, to $39 after Credit Suisse First Boston initiated coverage of the stock with a "hold" rating.

Prudential Securities cut Mercator Software to "hold" from "accumulate," and the stock fell $3.06, or 18 percent, to $13.75. The stock traded as low as $13.56 compared to its 52-week high of $149.87.

Natural MicroSystems rose $12.44, or 21 percent, to $70.88 after the maker of communications software said that one of its products has received approval in China and that it already has two customers. The shares traded as high as $71.50, a new 52-week high, compared to a low of $4.37.

The Philadelphia semiconductor index rose 12.66 to 1,124.19, led by chip designer Rambus, which gained $6.94 to close at $92.88.