Stocks Finish Lower

The Fed raised interest rates by a quarter point, as expected, while oil prices fell

Stocks fell on Tuesday after the Federal Reserve raised interest rates by a quarter point, as expected. Investors pored over the Fed's statement, which indicated more rate hikes to come. Oil prices dropped.

The Dow Jones industrial average dropped 76.11 points, or 0.72%, to 10,481.52. The broader Standard & Poor's 500 index was down 9.68 points, or 0.79%, to 1,221.34. The tech-heavy Nasdaq composite index lost 13.93 points, or 0.65%, to 2,131.33.

The Federal Open Market Committee boosted the Federal funds rate by 25 basis points to 3.75%. In its post-meeting release, the FOMC said that even though developments resulting from Hurricane Katrina have raised economic uncertainty, "they do not pose a more persistent threat."

The Fed also indicated that even though higher energy prices and other costs could add to inflation pressures, it is not worried about inflation.

"With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured," the Fed concluded.

The statement suggests that the central bank is on track for another quarter-point hike at its Nov. 1 meeting, says Standard & Poor's economist Beth Ann Bovino.

There was virtually no Katrina-related disruption to the U.S. housing starts data, which fell by 1.3% to 2.01 million in August, slightly below median forecasts. The small impact from Katrina is to be expected, says Action Economics, given the limited amount of activity in the region currently.

October West Texas Intermediate crude oil prices finished down $1.16 a barrel at $66.23. Tropical storm Rita was upgraded to a category two hurricane as it ripped through the Florida Keys. This news helped lure some buyers.

On the OPEC front, the cartel announced it would open up an additional 2 million barrels per day (bpd) of capacity, while leaving official production levels steady at 28 million bpd. Action Economics says its sources see little impact from the decision, and expect little if any of the new supply coming into the market, citing lack of refinery capacity, and the fact that the new crude on offer is the undesirable "sour" crude.

For Wednesday, other than the energy inventories report, there are no major economic releases coming.

In corporate news Tuesday, Microsoft (MSFT ) says it is reorganizing its corporate structure into three units to try to compete better with rivals.

Federated Department Stores (FD ) announced on Tuesday it will cut up to 6,200 jobs starting next year, including 1,700 in St. Louis at the corporate offices of May Department Stores that Federated acquired this year.

Goldman Sachs Group (GS ) posted earnings of $3.25 a share in the third quarter, vs. earnings of $1.74 during the same period a year ago. The company linked the gain to a 14% net revenue rise in its investment banking division.

Circuit City Stores (CC ) posted second-quarter earnings per share of 1 cent, vs. 6 cents loss a year earlier, on 5.3% higher same-store sales. The retailer raised fiscal year 2006 total sales growth expectations to 5%-8%, vs. previous 3%-6% estimate. The shares rose on the news.

Estee Lauder (EL ) shares fell after the cosmetics maker warned that first-quarter EPS will be "significantly" below previous guidance on net sales growth in low-single digits (constant currency). S&P and J.P. Morgan downgraded the stock.

Appliance-maker Maytag (MYG ) said it expects its third-quarter 2005 results to be "significantly" lower than it originally expected, due to higher costs. Standard & Poor's reiterated its hold rating on the stock.

Treasury Market

Treasuries yields turned lower at the long end, as the curve flattened, after the Federal Reserve raised interest rates. The yield on the benchmark 10-year note settled at 4.24%.

World Markets

European stock markets finished mixed on Tuesday. London's Financial Times-Stock Exchange 100 index fell 13.3 points, or 0.24%, to 5,416.4.

Germany's DAX index rose 36.73 points, or 0.75%, to 4,962.86 on short covering even though German ZEW economic sentiment plunged to 38.6 in September, from 50.0 in August and well below the consensus expectation for a 45.0 reading.

In Paris, the CAC 40 index was up 26.12 points, or 0.58%, to 4,531.8.

Asian markets finished solidly higher Tuesday.

In Tokyo, the Nikkei 225 Index rose 189.89 points, or 1.47%, to 13,148.57 extending a recent uptrend on back of optimism toward economic growth and support for reform-minded Prime Minister Koizumi. Upside was also driven demand from abroad, as foreign investors sought higher returns outside the U.S., says Standard & Poor's MarketScope.

Hong Kong's Hang Seng index finished up 258.66 points, or 1.73%, to close at 15,241.86.

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