Posted on: Wednesday, April 21, 2004

Greenspan's remark leads to erosive selloff

By Meg Richards
Associated Press

NEW YORK — Wall Street tumbled yesterday as Federal Reserve Chairman Alan Greenspan, confirming investors' fears about interest rates, hinted in congressional testimony that a rate increase is indeed expected.

Greenspan told Congress that the nation's banking system is well prepared to deal with rising rates, which the market interpreted as a new signal that the Fed will tighten its policy sooner rather than later. The Fed chairman didn't directly discuss interest policy in his remarks to the Senate Banking Committee, but is expected to do so today before the Joint Economic Committee.

Few analysts were surprised by Greenspan's remarks, but he sparked a selloff, sending the major indexes plummeting in the final hour of what had been a lackluster session. It also erased earlier gains on solid earnings reports from Dow components General Motors Corp., Pfizer Inc. and Altria Group Inc.

Kevin Caron, market strategist with Ryan, Beck & Co., said: "I wouldn't be at all surprised if they do begin to raise rates, and you see a burst of economic activity as folks go out and buy that new car, or buy a home, before rates go up higher."

Most economists don't expect the Fed to raise rates at its next meeting on May 4, but many believe that rates will move higher by the end of the summer. With so much advance warning, however, the rate hike itself is not expected to have much negative impact.

Until rates do go up, the markets are likely to remain volatile. Long-term investors should take heart, however. The underlying message is that the economy is expanding. Analysts surveyed by Thomson First Call forecast an average 17 percent rise in profits for the S&P 500.

Declining issues outnumbered advancers about 3-to-1 on the New York Stock Exchange. Consolidated volume came to a moderate 1.96 billion shares, compared with 1.50 billion Monday.