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The Federal Open Market Committee on Tuesday raised short-term interest rates for the 11th straight time, hiking the fed funds target rate to 3.75 percent - its highest level in more than four years. Although this is the rate that banks charge each other for overnight loans, it will also boost rates on credit cards, auto loans, home equity loans and adjustable-rate mortgages.

Although the Fed acknowledged that the impact from Hurricane Katrina would be a setback in the near term, it said it does "not pose a more persistent threat. Higher energy and other costs have the potential to add to inflation pressures." The Fed also opted to retain the word "measured" in its statement, reaffirming that rate hikes will continue.

The one noticeable change was the mention of longer-term inflation, which the Fed has long maintained "is expected to remain well-contained." Today's more bearish statement read: "longer-term inflation is expected to remain contained." The omission of the word "well" indicated to many that the Fed is becoming increasingly concerned about inflation.

U.S. Treasuries were under selling pressure for the better part of the morning and took a dive following the announcement. Yields, which move in the opposite direction of prices, soared. After the Fed statement was digested, however, buyers came back, sending yields on longer-term bonds back down to Monday's levels. The more rate-sensitive short-term issues closed slightly higher. Mortgage rates, which rise and fall with yields, remained close to those of yesterday.

Fed Ruins Wall Street Party

Stocks traded in positive territory a good part of Tuesday's session - until about 2:15 p.m., that is. That's when the Fed announcement came out and that's when stocks headed south for good. Although the Fed was expected to raise rates, some were hoping for a pause and many were thinking we might see a "time out" in November or December. But the Fed was quite forceful in letting all know, "The Committee believes that policy accommodation can be removed at a pace that is likely to be measured."

A disappointing report on Housing Starts had little effect on the major markets, although it did spur selling in home building stocks. In fact, the Dow's home construction index plunged 3.5 percent. Housing starts in August edged down 1.3 percent to an annual rate of 2.01 million units - slightly below the 2.04 posted in July. Analysts were expecting 2.03 million units. Building Permits fell more sharply, sliding 2.3 percent to an annual rate of 2.12 million from July's 2.17 million. This, however, was in line with analysts' forecasts.

Only four Dow Jones components closed in positive territory, and none posted significant gains. Losses, on the other hand, were steep in some cases. DuPont, Hewlett-Packard, Home Depot and McDonald's each lost well above 2 percent. Coca-Cola slid 1.6 percent on a downgrade, and it had plenty of company as Boeing, Merck, Honeywell and Wal-Mart also fell more that 1 percent.

In separate corporate reports, Tempur Pedic International plunged 29 percent after missing sales and earnings estimates, while Circuit City topped forecasts and added 6 percent. Stock in two stem cell research firms also rose sharply due to a positive test on mice by Stemcells Inc. The biotech boosted the Nasdaq with a 12-percent gain while its competitor Aastrom Bioscience added 7 percent on the session.

Tech stocks, however, had a tough day. JDS Uniphase and Qualcomm each gained 1.7 percent and Oracle rose 0.8 percent, but that's where it stopped. The other eight bellwethers closed negative, with Dell, Sun Microsystems and Cisco Systems each dropping more than 1 percent.

At closing:

The Dow 30 Industrial Index fell 76.11 points (-0.72 percent) to 10,481.52; the Nasdaq Composite index lost 13.93 points (-0.65 percent) to 2,131.33, and the benchmark Standard & Poor's 500 Index slid 9.68 points (-0.79 percent) to 1,221.34.

The 30-year Treasury bond rose 15/32 with the yield falling to 4.52 percent from 4.54 percent at Monday's close.

The 10-year Treasury note was up 1/32 in price with the yield holding at 4.24 percent.

The 5-year Treasury note lost 4/32 in price with the yield rising to 4.05 percent from 4.02 percent at Monday's close.

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

The 30-year Conventional Fixed-Rate Mortgage was at 5.621 percent -the same asMonday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.198 percent from 5.212 percent at Monday's close.

Coming Up:

There are no reports scheduled for release on Wednesday, which will leave the financial markets to continue scouring the nuances of the Fed statement. If Wall Street determines that the Fed is being vigilant in fighting inflation, stocks could turn around. Treasuries appear to have already accepted that premise, and could hold steady due to the lack of economic input.

If Treasuries maintain a status quo, mortgage rates are likely to do the same.

Carolyn Siegel

carolyn@interest.com

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