Wall Street dipped on Friday after an unexpected increase in the Federal Reserve's discount rate signaled to some investors that the U.S. central bank may be starting to retreat from its easy money policy.
Financial stocks were among the hardest hit, following the Fed's decision on Thursday to raise the discount rate for emergency loans it charges banks.
But the market took some comfort from a government report that showed consumer prices rose less than expected in January, soothing worries of inflation pressures and comments from Fed officials to calm speculation that the rate increase could bring forward broader policy tightening.
This is the early part of a process to a more important event which is raising the fed funds rate. The Fed is not ready to exit the door, but it has certainly put on a coat to do so yesterday and investors are reacting to that, said Burt White, managing director and chief investment officer of LPL Financial in Boston.
The Dow Jones industrial average <.DJI> was down 50.25 points, or 0.48 percent, at 10,342.65. The Standard & Poor's 500 Index <.SPX> was down 5.60 points, or 0.51 percent, at 1,101.15. The Nasdaq Composite Index <.IXIC> was down 12.01 points, or 0.54 percent, at 2,229.70.
New York Federal Reserve Bank President William Dudley said the Fed's pledge to keep benchmark interest rates ultra-low for an extended period is still very much in place, adding the discount rate increase for banks was a small technical change and not a signal about monetary policy.
The rise in discount rates, despite being a signal the economy is on the right track, took markets by surprise and alarmed investors who have relied heavily on near-zero interest rates and have shoveled cheap money into risky but higher-yielding investments such as equities and commodities.
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Earlier, a government report showed U.S. consumer prices rose less than expected in January, while prices excluding food and energy fell for the first time since 1982.
My take is if it's true that the Fed spooked the markets yesterday with their increase, this is certainly news that will have a calming effect, said Mike Schenk, senior economist for the Credit Union National Association In Madison, Wisconsin.
(Additional Reporting by Leah Schnurr)
(Editing by Theodore d'Afflisio)