Investors Want a Tougher Fed

What a difference a few months makes.

Last October, stocks sold off after a quarter-point rate cut from the Federal Reserve was taken as evidence that the Fed was out of touch with a brewing credit crisis by focusing too much on inflation.

Fast-forward six months to today, when stocks sold off on a quarter-point rate cut and policy statement that investors thought wasn’t nearly tough enough on inflation.

Since last fall, the Fed has cut interest rates by 250 basis points and engineered a dramatic rescue of Bear Stearns, among other measures that now appear to be enough to control a global credit crisis. Traders’ concern has now shifted to the weak dollar and rising commodity prices, and they had hoped that a tougher statement from the Fed today could have boosted the greenback and sent commodity prices tumbling.

Instead, the Fed gave the market the quarter-point cut it expected — but the accompanying policy statement was more neutral than hawkish, not as tough on inflation as expected and still emphasizing downside risks to economic growth.

As a result, stocks turned a greater than 1% gain before the statement was released into modest losses by the close. Still, stocks closed out April with their first monthly gain since October and their best month since 2003.

Better than expected first-quarter GDP growth of 0.6% was behind the early rally, even though the growth was driven largely by rising inventories and exports and masked domestic weakness. Computer sales were responsible for a fifth of first-quarter growth, but equipment and software investment declined for the first time in five quarters, down 0.7%. On the plus side, inflation readings came in better than expected for the quarter.

Yahoo (NASDAQ: YHOO) posted a small gain on reports that Microsoft’s (NASDAQ: MSFT) board of directors was meeting to discuss its next move in its takeover bid for the company, including the possibility of a higher offer.

SAP (NYSE: SAP), Alcatel-Lucent (NYSE: ALU), Unisys (NYSE: UIS), Garmin (NASDAQ: GRMN) and Savvis (NASDAQ: SVVS) all fell on their earnings reports, but IAC/InterActive (NASDAQ: IACI), Arris Group (NASDAQ: ARRS), Key Tronic (NASDAQ: KTCC), Gmarket (NASDAQ: GMKT) and Double-Take Software (NASDAQ: DBTK) gained on their quarterly results.

Google (NASDAQ: GOOG) rose 3% on reports that its YouTube unit is turning profitable.

The Nasdaq fell 13 to 2412, the S&P lost 5 to 1385, and the Dow shed 11 to 12,820 after briefly clearing 13,000 for the first time since the start of the year. Volume rose to 4.47 billion shares on the NYSE, and 2.2 billion on the Nasdaq. Advancers led by a 17-15 margin on the NYSE, while decliners held a slight edge on the Nasdaq. Downside volume was 54% on the NYSE, and 59% on the Nasdaq. New highs-new lows were 58-65 on the NYSE, and 56-113 on the Nasdaq.