Stocks fall amid concerns that Fed will boost interest rates

May 24, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks slumped yesterday amid concern that surging commodity prices and a sagging dollar will force the Federal Reserve to boost interest rates again to fight inflation and slow the economy.

"The market is saying the Fed's got to raise rates again," said William Dodge, chief investment strategist at Dean Witter Reynolds Inc.

Inflation fears sent the yield on the benchmark 30-year bond soaring to a 7.43 percent close, up 13 basis points from Friday. Yesterday's increase in the yield was the largest since May 6, when it rose 21 basis points. On Friday, bond prices also fell amid rising commodity prices.

Commodities for July delivery, as measured by the Commodity Research Bureau's index of 21 key prices, posted their biggest one-day gain since July. The index leapt 4.67 to 238.4, the highest level since October 1990. Yesterday's rise extends last week's 5.5-point gain.

Speculation is growing that 1994's fifth rate increase could come as early as this summer, sooner than expected after the last one on May 17, traders and analysts said.

The Dow Jones industrial average closed down 23.94, at 3,742.41, after falling as much as 39.30. Chevron Corp., General Motors Corp. and Sears, Roebuck & Co. paced the decline. Last week, the average added 106.67 points, to end at 3,766.35, its highest level since late March.

Broader market indexes also retreated. The Standard & Poor's 500 index fell 1.72, to 453.20, and the Nasdaq composite index dropped 1.75, to 724.95.

Stocks rallied last week after the Fed raised interest rates, bringing the rate on overnight loans between banks to 4.25 percent and the discount rate on Fed loans to member banks to 3.5 percent. The move reassured investors, temporarily, that the central bank was determined to fight inflation and support the currency, traders said.

But yesterday, the surge in commodity prices and the dollar's weakness against the German mark replaced the initial enthusiasm. "The dollar didn't respond favorably to the Fed tightening, and that's a problem," said Dean Witter's Mr. Dodge.

The dollar fell against most major currencies yesterday and was last quoted in New York at 1.6435 marks, down from 1.6470 marks. The U.S. currency managed a small gain, to 104.40 yen from 104.30 yen, amid optimism that the United States and Japan will break an impasse in trade relations during talks in Washington.

Since the Fed boosted rates last Tuesday, the dollar has fallen as much as 2 percent against the mark as confidence in U.S. assets and the Clinton administration's trade policies waned.

A rally in food companies tempered the stock market's decline. Food shares jumped after Switzerland's Sandoz Ltd. agreed to buy Gerber Products Co., a leading baby-food maker, for $53 a share, or $3.7 billion. Shares of Gerber vaulted $15.50, to $50.125.

Two stocks fell for every one that rose on the New York Stock Exchange. Trading was sluggish, with about 252 million shares changing hands on the Big Board.

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