Dow drops 100 after Fed official’s warning

NEW YORK—A quiet day on Wall Street turned into the worst sell-off in three months after a Federal Reserve official said he doubted the bank’s effort to boost economic growth would work. Charles Plosser, president of the Fed’s Philadelphia branch, told an audience yesterday that the Fed’s effort to support the economy would likely fall short of its goals.

The speech probably startled some investors who had faith in the Fed’s latest plan, said Jack Ablin, chief investment officer Harris Private Bank. The plan includes buying US$40 billion in mortgage bonds each month until the economy improves. “So many investors have bought into the illusion,” he said. “And it was like Plosser pulled up the curtain on the Wizard of Oz.”

The Standard & Poor’s 500 index lost 15.30 points, its fourth straight decline, to close at 1,441.59. The 1.05 per cent drop was the worst for the S&P since June 25. The Dow Jones industrial average lost 101.37 points to close at 13,457.55. Caterpillar tugged the Dow down, losing four per cent. The world’s largest maker of bulldozers and other heavy equipment said late Monday that slower economic growth around the world dampened its earnings forecast. Its stock sank US$3.86 to US$87.01.

Stocks enjoyed one of their biggest rallies of the year Sept 6 after Mario Draghi, the president of the European Central Bank, laid out a plan to buy unlimited amounts of government bonds to lower borrowing costs for Europe’s debt-burdened countries. A week later, Fed Chairman Ben Bernanke announced the central bank’s open-ended mortgage bond-buying programme and pledged to hold interest rates at super-low levels into 2015.

The S&P soared to a nearly five-year closing high of 1,465 the next day, Sept. 14, but has drifted lower since and fallen back almost to where it was before Bernanke’s announcement. On Tuesday, three economic reports gave the stock market a nudge in morning trading. House prices rose in major cities for a third straight month, and a gauge of consumer confidence came in surprisingly high.

More surprising than those two economic reports was the Richmond Federal Reserve’s strong reading on regional manufacturing, a recent trouble spot, said Phil Orlando, chief equity strategist at Federated Investors.

AP