Fed cuts rates; inflation remains a worry

By Charley Blaine and Elizabeth Strott

The Federal Reserve cut its key rates to their lowest levels in four years today but left some investors worried that it doesn't yet have a handle on inflation.

Because of that unease, stocks may open lower on Thursday, despite the prospect of huge earnings from oil giant ExxonMobil (XOM, news, msgs).

The Fed cut its key federal funds rate to 2% from 2.25% today and offered signals it won't be doing anything on rates again anytime soon.

The fed funds rate -- the rate banks charge each other for overnight loans -- is the basis of many business and consumer loan rates. The Fed also cut its discount rate -- the rate it charges banks for short-term loans -- to 2.25% from 2.5%.

But a stock market rally evaporated in the last hour or so of trading. The Dow Jones industrials, up as much as 178 points shortly before 3 p.m. ET, closed down about 12 points to 12,820. The Standard & Poor's 500 Index, up as many as 14 points, fell back to a loss of 5 points to 1,386.

And the Nasdaq Composite Index was down 13 points, 0.6%, to 2,413.

The Dow and S&P 500 would have finished lower except for General Motors (GM, news, msgs), which was the best performer in both indexes. GM finished up 9.4% to $23.20 after a first-quarter loss proved better than expected. That added about 16 points to the Dow.

The inflation unease crept into the market, CNBC's Bib Pisani reported, because a number of traders worried that the central bank wasn't explicit enough that inflation is going to be a big concern going forward.

Traders pushed the dollar lower late in the day and, in after-hours trading, both gold and oil rose sharply. Gold closed at $865.10 an ounce. In electronic trading at 6:40 p.m., it bounced back to $877.40. Crude oil closed at $113.46, its first finish under $114 in two weeks. But it bounced back to $114.53 by 6:40 p.m.

Financial stocks weakened late in the day. Investment bank Lehman Bros. (LEH, news, msgs), which had been slightly lower, dropped more than $2 in the last 40 minutes of trading to $44.24 -- a 5% loss on the day.

Meanwhile, program trading did appear to be at work. Sell orders hit the market as soon as the S&P 500 closed in on 1,407, a key resistance level.

And selling hit a number of big technology stocks. BlackBerry maker Research In Motion (RIMM, news, msgs) fell 3.4% to $122. Apple (AAPL, news, msgs), which had been up 2.8%, fell back to a 0.6% loss at $173.95. Chip giant Intel (INTC, news, msgs) was off 1.6% to $22.26.

In a statement on the rate cuts, the Fed said financial markets "remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. "

It said it was concerned about the pressures of higher energy and food prices.

The statement offered two hints that Fed won't move rates much at least in the near future.

• First, it said that its seven interest-rate cuts since Sept. 18 -- and important moves to add cash to the global financial system -- "should help to promote moderate growth over time and to mitigate risks to economic activity."

• The Fed also deleted a key phrase from prior statements that "downside risks to growth remain.

Today's move, which had been expected, came at the end of a two-day meeting and after the Commerce Department reported this morning that the U.S. economy showed almost no growth in the first quarter for the first time since 2002.

Despite the sell-off, the Dow and S&P 500 finished April with gains of 4.5% and 4.8%, respectively. The gains were the first for the indexes after five straight declines and their best showings since December 2003. The Nasdaq ended the month with a 5.9% gain, its best month since October 2003.

Today's market was boosted before the Fed announcement by a better-than-expected report on the health of the economy, although the 0.6% annualized gain for gross domestic product was hardly robust.

The practical effect of the Fed's rate cut will be minimal -- unless longer-term rates, like mortgage rates, can come down. While a short-term rate like the yield on a 13-week Treasury bill has dropped from 3.1% in December to under 1.5% now, mortgage rates, as tracked by Bankrate.com, have stubbornly hovered between 5.5% to 6% since February.

And a larger question is whether lenders will expand their lending. The credit crunch has made banks very wary about extending new credit.

The Fed's move comes after eight months that saw crude oil climb to near $120 a barrel and gasoline near $4 a gallon. The U.S. housing market is in its worst slump since the 1970s. The Fed even had to help rescue investment bank Bear Stearns (BSC, news, msgs) from collapse.

But the winter's tumult seems to be easing. The Dow is up 10.3% from its lows in January; the S&P 500 and Nasdaq are up 11% and 13% from their March lows. Still, the U.S. stock market remains roughly 10% off its October 2007 peaks.

The fed funds rate was last at 2% between Nov. 10 and Dec. 14, 2004.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$113.46	$115.63	-$2.17	11.70%	18.21%
Heating oil (per gallon)	$3.1770	$3.2465	-$0.0695	4.19%	19.91%
Natural gas (per million BTU)	$10.8430	$10.8420	$0.0010	7.35%	44.90%
Unleaded gasoline (per gallon)	$2.9312	$2.9392	-$0.0080	12.04%	17.68%

Starbucks earnings fall 21%

Starbucks (SBUX, news, msgs), faced with a sharp drop-off in customers, reported today that earnings declined 21% during the second quarter.

Starbucks said net income declined to $108.7 million, or 15 cents a share, from $150.8 million, or 19 cents a share, a year ago. Revenue rose 12% to $2.5 billion.

The report came just a week after the world’s largest coffee chain warned of lower-than-expected earnings and cut its full-year forecast, describing the economic environment as the weakest in the company’s history. Wall Street analysts had forecast 19 cents a share for the quarter.

Shares were down 0.4% to $16.16 in after-hours trading. The stock, which had closed up 3 cents to $16.23 in regular trading, is down nearly 60% in the last two years. Investors have been worried about slow growth in the United States and rising costs.

GDP is weakly positive

The Commerce Department's initial reading on first-quarter gross domestic product was better than economists had expected. But don't start cheering.

The GDP rose 0.6%, better than the consensus estimate of 0.3% growth.

But there was plenty of weakness in the report to concern investors and consumers alike.

Consumer spending increased at a 1% annual pace, the weakest growth since the 2001 recession and less than half its comparable rate of growth in the fourth quarter. Higher prices cut into consumer spending for food and energy, while sales of autos, furniture and other durable goods shrank.

Business investment faltered, dropping 2.5%, Marketwatch.com noted. It was the worst investment quarter in four years.

Residential investment plunged 26.7% on an annualized basis, the weakest performance for housing since the 1981 recession. Housing has been a drag on growth for nine straight quarters, the longest downturn since the mid-1950s.

GM beats The Street

General Motors shares jumped after the U.S. automaker reported better-than-expected first-quarter results and offered more evidence that the U.S. auto industry is starting to see some progress from years of painful downsizing and restructuring.

Excluding one-time losses from the sale of GMAC, GM lost $350 million, or 62 cents per share, better than the $1.62-per-share loss analysts expected.

Including charges, the Dow component reported a loss of $3.3 billion, or $5.74 per share -- far worse than the profit of $62 million, or 11 cents per share, in the same quarter last year.

Sales fell 1.6% to $42.7 billion but topped the consensus estimate of $40.8 billion.

• Top Stocks blog: GM sales up everywhere but here

Chief Executive Officer Rick Wagoner was optimistic. "The credit markets seem to have loosened up a bit over the last couple of weeks," he told CNBC this morning. "If we could begin to get some re-stabilization of credit flows, I would say that is perhaps the beginning of getting things moving in the right direction."

Wagoner's remarks echoed last week's message from rival Ford Motor (F, news, msgs), which reported a first-quarter profit of $100 million -- encouraging hopes that CEO Alan Mulally may be engineering a turnaround.

Earlier this week, billionaire investor Kirk Kerkorian's Tracinda Corp. offered to boost its investment in Ford.

Microsoft still weighing Yahoo plans

The standoff between Microsoft (MSFT, news, msgs) and Yahoo (YHOO, news, msgs) remained in a state of suspended animation today after Microsoft's board of directors met today and, according to The Wall Street Journal didn't come a decision on what to do next. (Microsoft is the publisher of MSN Money.)

A decision, however, was expected later this week.

Microsoft could nominate its own board of directors for Yahoo, initiating a hostile takeover, the Wall Street Journal has reported.

Microsoft on Feb. 1 offered $31 per share for Yahoo, but Yahoo rejected the bid as too low. The cash-and-stock offer is now worth about $29.12 per share, because Microsoft shares have lost value over the past three months.

Yahoo hasn't announced a date for its annual meeting, but it must be held by July. Waiting for the meeting could be helpful to Microsoft, allowing time for its shares to regain value, the paper reported.

Microsoft CEO Steve Ballmer has also indicated that the company could walk away from a deal.

Microsoft closed down 0.4% to $28.52. Yahoo was up 0.2% to $27.41 in regular trading and was little changed in after-hours trading.

Profit, outlook rise at Procter & Gamble

Along with General Motors, Dow component Procter & Gamble (PG, news, msgs) shares rose after reporting better-than-expected earnings. P&G shares finished up 1.8% to $67.05, third-best among the Dow stocks.

P&G said it earned $2.71 billion, or 82 cents per share, up from $2.51 billion, or 74 cents per share. Earnings beat the consensus estimate by a penny. Revenue rose 9.4%, to $20.46 billion.

Procter & Gamble also said it expects to earn $3.48 to $3.50 a share. Its previous forecast was $3.46 to $3.50 per share.

Analysts are expecting P&G to earn $3.49 per share.

Short hits from the markets -- 4 p.m.

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.340%	1.440%	-0.100	-0.74%	-57.32%
5-year Treasury note yield	3.033%	3.108%	-0.075	19.64%	-12.21%
10-year Treasury note yield	3.759%	3.825%	-0.066	8.45%	-6.84%
30-year Treasury bond yield	4.497%	4.559%	-0.062	3.50%	0.85%
Currencies
U.S. Dollar Index	72.720	73.105	-0.385	0.77%	-5.18%
British pound in dollars	$1.9877	$1.9881	-0.0004	0.20%	-0.08%
Dollar in British pounds	£0.5031	£0.5030	0.0001	-0.20%	0.08%
Euro in dollars	$1.5635	$1.5620	0.0015	-0.73%	6.97%
Dollar in euros	€ 0.6396	€ 0.6402	-0.0006	0.74%	-6.52%
Dollar in yen	¥103.90	¥103.93	-0.03	4.10%	-7.11%
Canadian dollar in U.S. dollars	$0.993	$0.994	-$0.0009	1.57%	0.01%
U.S. dollar in Canadian dollars	$1.008	$1.006	$0.0016	-1.56%	-0.01%
Commodities
Gold	$865.10	$876.80	-$11.70	-2.76%	3.23%
Copper	$3.9045	$3.8810	$0.02	-0.17%	28.40%
Silver	$16.5930	$16.6400	-$0.05	-2.15%	11.21%
Corn	$6.0025	$5.9125	$0.09	5.82%	31.78%
Crude oil (NYMEX) (per barrel)	$113.46	$115.63	-$2.17	-4.27%	18.21%

Citigroup raises capital

Citigroup (C, news, msgs) shares tumbled 4% to $25.27 today after the banking company said it would sell new shares to raise $4.5 billion in new capital.

The stock sale, announced late Tuesday, is supposed to give Citigroup increased flexibility and strength in dealing with the mortgage mess. But it will dilute the investment of existing shareholders, and some weren't happy about the news.

"This was extremely disappointing," said William Fitzpatrick, equity analyst at Optique Capital Management, to Bloomberg Television. "We were hoping they wouldn't have to go to the equity markets like this."

So far this year Citigroup has sold $6 billion of preferred shares and raised more than $30 billion through equity deals with sovereign wealth funds abroad. The banking giant has been battered by the credit- and mortgage-market meltdowns. The mess forced Chuck Prince to resign as chief executive officer in January.

"The fact is, you can never say never with regards to these things," Chief Financial Officer Gary Crittenden told analysts on a conference call. "Our commitment is to have a strong capital base."

Citigroup was one reason why financial stocks generally were lower today.

AT&T to cut iPhone price

Consumers hungry for a little good news will be happy to hear of a price that's going down.

AT&T (T, news, msgs), the exclusive U.S. carrier for Apple iPhone, is reportedly going to lower the price of the newest 3G iPhone by $200 to $199, according to Fortune magazine. The price cut is a move to attract people who haven't yet been willing to pay hundreds of dollars for the all-in-one wireless device.

The $200 discount likely would apply only to purchases through AT&T, the magazine reported, and not through Apple stores.

The newest version of the phone is expected to hit shelves in late June, a year after the iPhone was introduced. AT&T was up 1% to $38.71.