Fed news pushes stocks downward

U.S. stocks skidded anew today as the Federal Reserve made the unusual move of lowering its 2007 and 2008 U.S. growth forecast for the second time in two months. Also, consumer confidence fell in August to its biggest monthly drop since Hurricane Katrina two years ago, and major brokers were hit with ratings downgrades — Merrill Lynch downgraded Bear Stearns, Citigroup and Lehman Brothers to “neutral” from “buy” amid concern over mortgage-related woes and also cut Goldman Sachs’ and Morgan Stanley’s stock price target.
The Dow Jones industrial average fell 280.28 points, or 2.1%, ending trading at 13,041.85. The S&P 500 closed down 34.43, or 2.35%, at 1,432.36; and the Nasdaq ended down 60.61, or 2.37%, at 2,500.64. All numbers are preliminary.
Stocks extended their losses after the Fed released the minutes of its Aug. 7 rate-setting meeting, saying it had lowered its forecast of real GDP growth “in part due to … less accommodative financial conditions” and continued its focus on inflation. The Fed did not spell out its new growth rate forecast. In July, the central bank had already told Congress it was lowering its 2007 forecast to 2.25%-2.5% from a 3% estimate in February and its 2008 growth forecast to 2.75% from 3%.
“The issue is how long this financial strain will last. If we are still involved in this when Fed officials next meet on Sept. 18, then they may act (on the funds rate),” said Milton Ezrati, senior economist at Lord Abbett. “Growth will slow. It happens in every cycle, as the cycle matures, amid the realization that rapid growth will not go forever.”