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Yields of U.S. Treasury securities climbed sharply when the Federal Open Market Committee, or FOMC, raised short-term interest rates another 25 basis points -- for the 15th consecutive time. Although the rate hike was fully expected, the accompanying statement suggested that further credit tightening might be needed to control inflation. This spurred selling in the financial markets, hitting Treasuries and the Dow Jones industrials the hardest.

While the Fed admitted that 'the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation (and) ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained,' it also noted that 'possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.'

To that end, the Fed said 'some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.' The FOMC concluded that it will 'respond to changes in economic prospects as needed to foster these objectives.'

Although the specter of future rate hikes -- unknown in quantity -- pushed the yield on the benchmark 10-year note close to 4.8 percent before receding, Treasuries sold earlier on the strength of the consumer confidence report that showed confidence in March at its highest level since May 2002. The index climbed to 107.2 from an upwardly revised 102.7 reading in February. The report, however, showed that while those surveyed were confident about their present situations, they were less optimistic about the future.

Although selling picked up after the Fed's announcement around 2:15 pm EST, and Treasury yields, which move in the opposite direction of prices, have risen, it is too early to see any effect on mortgage rates, which remain near yesterday's levels.

Stocks tumble on Fed statement

The Dow Jones industrials led the Wall Street sell-off, with 29 of the 30 components closing in negative territory. Investors found nothing to celebrate in the Fed statement that spoke of the threat of inflation and higher interest rates. In addition, oil prices topped $66 a barrel due to problems in Nigeria, uncertainty over supply from Iran and Iraq, and strikes in France and Norway.

Hewlett-Packard suffered the steepest loss, plunging 3.14 percent on the session, but there were nine other components with hefty 1-percent declines. Home Depot was the only Dow member to be spared, as it closed flat on the day. Many stocks that were climbing earlier couldn't hold their gains, but Lennar Corp. was an exception. The home builder added 1.2 percent after beating earnings estimates and reporting an increase in orders.

The Nasdaq traded positive all day, until the Fed announcement, that is. However, some big-cap techs remained strong. Yahoo! finished with a 2.99 percent increase, and Google added 2 percent. JDS Uniphase was up 1.5 percent, while Sun Microsystems posted a 0.8-percent gain. But Cisco Systems, Oracle and Dell each fell more than 1 percent, keeping the pressure on.

As of 4 p.m. EST:

The Dow Jones industrial index closed down 95.57 points (-0.85 percent) to 11,154.54; the Nasdaq composite lost 11.12 points (-0.48 percent) to 2,304.46, and the Standard & Poor's 500 index fell 8.38 points (-0.64 percent) to 1,293.23.

The 30-year Treasury bond closed down 1-2/32 in price with the yield rising to 4.79 percent, from 4.72 percent on Monday.

The 10-year Treasury note closed down 18/32 in price with the yield rising to 4.77 percent, from 4.69 percent on Monday.

The five-year Treasury note closed down 13/32 in price with the yield rising to 4.78 percent, from 4.68 percent on Monday.

The two-year Treasury note closed down 5/32 in price with the yield rising to 4.79 percent, from 4.73 percent on Monday.

At 4 p.m. EST, average mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year conventional fixed-rate mortgage was at 6.114 percent, down from 6.125 percent on Monday.

The 15-year conventional fixed-rate mortgage was at 5.706 percent, down from 5.739 percent on Monday.

Coming up:

There is no economic news scheduled for release on Wednesday, which will likely allow the financial markets to dwell on the Fed statement and future prospects for inflationary pressures and rate hikes to control them.

Mortgage rates were largely unchanged on Tuesday, but it is likely that lenders will begin edging them up to keep pace with the increases in Treasury yields.

Carolyn Siegel

Carolyn@interest.com

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