Stocks tumble on $135 oil, Fed meeting minutes

Early in the day, stocks began falling on the surging price of oil, which shot up more than $4 and breached $135 a barrel for the first time on the futures market Wednesday.

The stock market slumped further after minutes from last month's Fed meeting revealed that while policymakers expected sharply lower economic growth and higher unemployment later this year, inflationary risks are likely to keep the central bank from cutting rates again. Lower interest rates spur economic growth, but they also tend to accelerate inflation.

High commodities prices have been a big source of anxiety for investors, as many retailers and credit card companies have noticed consumers paring back spending on discretionary items, including clothing and jewelry, to be able to afford necessities such as gasoline and groceries.

Meanwhile, the Fed's minutes suggest the central bank's two main priorities -making sure the economy is growing, and keeping inflation in check -are both going to be tough to achieve through monetary policy. That is a troubling prospect for investors hoping that the economy will bounce back in the second half of the year and that the central bank will be able to concentrate on controlling inflation.

"It absolutely underscores the two competing mandates for the Federal Reserve: growth, and price stability. It captures the tug-of-war between the two mandates, crystallizes how different those two mandates are," said Quincy Krosby, chief investment strategist for The Hartford. "If employment deteriorates dramatically, the Fed has a choice -do they worry about inflationary pressure, or do they want to continue to support their growth mandate?"

The Dow fell 227.49, or 1.77 percent, to 12,601.19, after falling nearly 200 points on Tuesday. The blue chip index's two-day drop of about 427 points, or 3.3 percent, is its biggest since Feb. 28-29.

Broader stock indicators also stumbled. The Standard & Poor's 500 index fell 22.69, or 1.61 percent, to 1,390.71, while the Nasdaq composite index fell 43.99, or 1.77 percent, to 2,448.27.

Government bond prices rose as investors searched for safer assets. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.81 percent from 3.78 percent late Tuesday.

Crude oil soared $4.19 to settle at $133.17 a barrel on the New York Mercantile Exchange -about $20 higher than it was at the beginning of May. It passed $135 a barrel in after-hours trading.