After the Fed's half-point reduction in September, most investors expect the central bank to deliver a quarter-point cut at the conclusion of its two-day meeting on Wednesday.But inflation remains a threat. Crude oil prices fell Tuesday, but only after hitting a record a day earlier, and meanwhile, the dollar has been tumbling. So a rate cut -- much less additional decreases in the coming months -- is not a given.
Some on Wall Street fear economic growth could halt if rates aren't lowered, given the troubles in housing and credit. The statement the Fed issues alongside its rate decision will be closely read for clues about future moves.
"We don't think the economy's about to slip into recession. The corporate portion of the economy is still in pretty good shape," said Phil Orlando, chief equity market strategist at Federated Investors. "However, should the Fed choose not to cut anymore, and the economy continue to slip, that potentially could raise some concerns for us."
Most earnings have been coming in better than expected over the past few weeks, particularly in the technology sector. But consumers, the key drivers of the economy, appear to be flagging.
Following last week's news of a significant decline in existing home sales and Standard & Poor's report Tuesday of home prices sinking further, the Conference Board said its index of consumer confidence fell to its lowest level in two years in October. The index came in at 95.6, below the consensus estimate of 99.5 and down from a revised reading of 99.5 in September.
The Dow Jones industrial average fell 77.79, or 0.56 percent, to 13,792.47.
Broader stock indicators were mixed. The S&P 500 index fell 9.96, or 0.65 percent, to 1,531.02, while the Nasdaq composite index fell 0.73, or 0.03 percent, to 2,816.71.
Treasury bond prices were little changed ahead of the Fed decision. The yield on the 10-year Treasury note, which moves inversely to its price, was at 4.38 percent, flat with late Monday.
The market remains nervous that even if the Fed decreases the target fed funds rate by a quarter-point or half-point, the move may not end up helping the credit and housing markets. It's not the price of borrowing that's deterring investors, many say; demand has waned because of worries about the quality of the underlying assets.
Furthermore, the central bank must walk a narrow line between keeping investors calm and acknowledging the problems out there -- particularly for the banks and brokerages that could see more big losses if portions of the credit market, like asset-backed commercial paper, don't improve.
"Providing the superficial image of stability when everybody realizes things aren't normal just doesn't work," said Axel Merk, manager of the Merk Hard Currency Fund.
In addition to this week's Fed decision, Wall Street faces important economic data. On Wednesday, the Commerce Department issues a reading on third-quarter gross domestic product; Thursday, the Labor Department reports on personal spending, income and inflation; and Friday, the Labor Department releases its highly anticipated jobs report.
Some disappointing financial reports from Procter & Gamble Co. and Qwest Communications International Inc., as well as a management shake-up at Merrill Lynch & Co., gave the market little reason to buy ahead of the Fed meeting.
Merrill Lynch's chairman and chief executive, Stan O'Neal, retired Tuesday as expected after the brokerage last week posted the biggest quarterly loss in its 93-year history. But no replacement was named. Alberto Cribiore, a director since 2003, was named interim non-executive chairman. Merrill Lynch fell $1.86, or 2.8 percent, to $65.56.
Procter & Gamble was the biggest loser among the 30 Dow components after warning that higher commodity costs will squeeze margins. P&G fell $2.88, or 4 percent, to $68.95.
Although Qwest reported a third-quarter profit jump, its shares tumbled $1.12, or 13.7 percent, to $7.06, after the telecommunications company declined to give details about its outlook.
The technology-dominated Nasdaq performed better than the other indexes, helped by ongoing strength in such bellwethers as Apple Inc., Microsoft Corp., and Google Inc. Apple rose $1.91 to $187; Microsoft rose $1, or 2.9 percent, to $35.57; and Google rose $15.54, or 2.3 percent, to $694.77.
Crude oil prices retreated $3.15 to settle at $90.38 a barrel, after hitting a record on Monday above $93 a barrel. Gold also fell.
The dollar declined against most other major currencies, except the yen.
Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange. Volume has been fairly light so far this week; consolidated volume came to 3.11 billion shares Tuesday, up from 3.02 billion Monday.
The Russell 2000 index of smaller companies fell 5.57, or 0.68 percent, to 816.15.
Overseas, Britain's FTSE 100 fell 0.70 percent, Germany's DAX index fell 0.40 percent, and France's CAC-40 fell 0.55 percent. Japan's Nikkei stock average fell 0.28 percent, while Hong Kong's Hang Seng index rose 0.16 percent.
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