NEW YORK - Stocks took a dive, while bond yields jumped and the dollar firmed as financial markets reacted nervously to the Federal Reserve's warning about inflation in its rate decision Tuesday.
Analysts said investors were unsettled by the more hawkish tone on inflation adopted by the Federal Reserve in its statement accompanying its latest decision to raise interest rates by 25 basis points.
On Wall Street, the Dow Jones Industrial Average saw a rally cut short, and skidded 51.23 points (0.48 percent) to 10,514.16, while the Nasdaq tumbled 8.10 points (0.40 percent) to 1,999.41 at 1945 GMT, some 30 minutes after the announcement from the central bank.
Bonds slid on the hint of higher inflationary pressures. The yield on the 10-year US Treasury bond jumped to 4.602 percent from 4.479 percent moments before the announcement. The higher yields reflects lower bond prices.
The dollar firmed, taking the euro down to 1.3133 dollars from 1.3199.
"The Fed emphasized the increase in commodity prices which adversely affected the market," said Robert Pavlik, portfolio manager at Oaktree Asset Management, who argued that the Fed was signaling it will end its "measured" policy soon.
The Fed gave the market a breather by reiterating it will continue to raise its key short-term interest at a "measured" pace, but this is likely to change at its next meeting in May, said Pavlik.
"I believe the term 'measured' will likely be removed at the next Federal Reserve meeting in May," he said.
"The Fed will have more information at its disposal on commodity prices and removing the statement will allow the Fed more leeway to adjust interest rates moving forward."
Jeffrey Kleintop, chief investment strategist at PNC Advisors, agreed.
"People were wondering if they would deviate from words like 'measured' and 'accommodative' so it's really the inclusion of that line on pricing power and a pick up in inflation that has hit the market," he said.
Kleintop said the market is probably less concerned about a change in the pace of interest rate changes and more concerned about where inflation will be at year end.

03/22/2005 20:04 GMT