- The Washington Times - Tuesday, August 9, 2005

NEW YORK (AP) — Wall Street enjoyed a solid advance yesterday after the Federal Reserve raised short-term interest rates for the 10th time in more than a year but changed its policy statement to say longer-term inflation expectations are well-contained. The market saw the Fed statement as a hoped-for sign that the central bank’s streak of rate increases may be nearing its end.

Stocks bumped higher after the Fed’s announcement, although investors had expected the rate increase to 3.5 percent, a four-year high. The Fed signaled that at least one more rate increase is coming, but many investors expect three more.

Wall Street also was soothed as crude oil futures fell to $63.07 a barrel, down 87 cents, on the New York Mercantile Exchange. Oil hit a record intraday high of $64.27 Monday after an announcement that the U.S. Embassy in Saudi Arabia would close for two days because of threats.

Investors also cheered Labor Department data showing work force productivity rose at a slower rate than it had in the first quarter. Labor costs also grew at a slower rate than the previous nine months. Analysts are looking for the economy to grow at a moderate pace, since torrid growth might lead to inflation and even more interest rate increases than anticipated.

The Dow Jones Industrial Average rose 78.74, or 0.75 percent, to 10,615.67 after three days of losses.

Broader stock indicators also advanced. The Standard & Poor’s 500 index rose 8.25, or 0.67 percent, to 1,231.38, and the Nasdaq Composite Index rose 9.80, or 0.45 percent, to 2,174.19.

Bonds rose, with the yield on the 10-year Treasury note at 4.39 percent, down from 4.42 percent late Monday, the highest yield since April. The U.S. dollar was up against the euro in European trading. Gold prices were higher.

In its policy statement, the Fed repeated its previous view that “pressures on inflation have stayed elevated” but added that “core inflation has been relatively low in recent months and longer-term inflation expectations remain well-contained.”

The market has spent most of the year nearly flat, which suggests that investors are worried about energy costs, consumer spending, housing and the economy, in addition to interest rates, said Jeff Kleintop, chief investment strategist for PNC Financial Services Group in Philadelphia.

After strong second-quarter earnings and months of positive economic data, the market’s consensus is that the Fed’s rate increases are justified. But, because of the other factors that could affect the economy, investors are split on whether the Fed’s increases will be enough to contain inflation without causing a recession.

“While the market has priced in three more rate hikes after today, what it is less sure of is if the Fed will be successful, no matter how many rate hikes,” Mr. Kleintop said.

The market’s bounce may have just been a matter of timing, said Peter Martin, senior technical analyst at Prudential Equity Group. “We had three or four down sessions. We were due for a bounce. But when you look at the complexion, the volume, the advancers versus decliners, it’s a positive day, but it’s not a runaway day.”

In company news, May Department Stores Co. said its second-quarter profit fell by nearly half from a year earlier, hurt by expenses from its planned merger with rival Federated Department Stores Inc., the owner of Macy’s and Bloomingdale’s. The retailer’s profits missed analysts’ estimates by a wide margin. Its stock fell 13 cents to $40.07.

Cisco Systems Inc.’s fiscal fourth-quarter profits, reported after the close of trading, jumped nearly 12 percent as the leading network equipment maker continued to benefit from strong demand from its corporate customers. Excluding special items, the company met analysts’ expectations. Its shares closed up 36 cents to $19.61, then rose an additional 10 cents a share in extended trading, hitting $19.71.

Blockbuster Inc. fell 92 cents to $7.09 after the nation’s biggest movie-rental chain reported a second-quarter loss because of a revenue decline after it eliminated late fees. Adjusting for one-time items, the company missed analysts’ estimates by 10 cents a share.

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