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NEW YORK — Wall Street retreated Wednesday ahead of a widely expected interest rate cut by the Federal Reserve, as investors cashed in some profits from the stock market’s two-day rally.
The stock market has been banking on another rate reduction Wednesday afternoon after the central bank’s drastic three-quarter-point cut in the target fed funds rate a week ago. The only uncertainty in investors’ minds is whether the Fed will lower the rate by a sizable half point or a more cautious quarter point.
A larger cut would show central bankers remain concerned about stimulating a flagging economy, while a smaller move would point to nervousness about inflation.
The economy slowed more than expected in late 2007, the Commerce Department said Wednesday in its preliminary fourth-quarter gross domestic product report. The economy expanded at a 0.6 percent annual clip, below the 0.8 percent pace projected by analysts polled by Thomson/IFR and well below the 4.9 percent growth seen in the third quarter.
For all of 2007, gross domestic product grew 2.2 percent, the weakest rate since 2002. The tepid late-year growth should help advance the case that the Fed needs to reduce rates further, given that many economists believe growth has slowed even more in the current quarter.
“The economy has been weakening significantly, and the GDP number gives the Fed a reason to cut aggressively,” said Thomas J. Lee, chief U.S. equities analyst at JPMorgan. He said many investors are expecting the market to sell off after the Fed’s decision, but that he believes it will respond well.
“Frankly, the trading on Fed announcements is strange, because it’s a strange game of anticipation,” Lee said.
The Dow Jones industrial average fell 36.98, or 0.30 percent, to 12,443.32, after rising 273 over Monday and Tuesday.
Broader stock indicators were also lower. The Standard & Poor’s 500 index fell 4.24, or 0.31 percent, to 1,358.06, while the Nasdaq composite index fell 9.07, or 0.38 percent, to 2,348.99.
Government bond prices slipped, sending yields higher. The yield on the 10-year benchmark note rose to 3.71 percent from 3.68 percent late Tuesday.
Concerns that the world’s banks have not seen the last of the fallout from the subprime mortgage crisis were reinforced by troubling news Wednesday from two major European banks.
Swiss bank UBS said it will have a $11.4 billion fourth-quarter loss mostly because of bad investments in subprime mortgages. Analysts had expected a much smaller shortfall. French bank BNP Paris Wednesday said its quarterly profit will decline by 40 percent from year-earlier levels.
Meanwhile, Yahoo Inc. took a thumping Wednesday after the Internet search company said its quarterly profit declined, its 2008 sales outlook was below analysts’ forecasts, and that it was slashing 1,000 jobs.
Yahoo Inc. fell $1.85, or 8.9 percent, to $18.96.
The biggest loser among the 30 Dow components Wednesday was Merck & Co., which late Tuesday reported a $1.63 billion fourth-quarter loss in the fourth quarter due mostly to charges for its Vioxx litigation settlement.
Merck fell $2.32, or nearly 4.8 percent, to $45.69.
Overseas markets fell ahead of the U.S. rate decision. In Tokyo, the Nikkei fell 0.99 percent. In Europe, London’s FTSE 100 dropped 0.81 percent, Paris’ CAC 40 lost 1.37 percent and Frankfurt’s DAX fell 0.26 percent.
Crude oil rose 25 cents to $91.89 a barrel on the New York Mercantile Exchange.
The dollar was mixed against rival currencies, while gold prices dipped.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 639.1 million shares.
The Russell 2000 index of smaller companies was down 5.58, or 0.79 percent, at 699.62.
Even if the Fed comes through with the large rate cut investors have been hoping for, most market watchers agree that Wall Street still has months of uncertainty ahead of it.
“The consumer is essentially under enormous pressure,” JPMorgan’s Lee said, noting that even if the fiscal stimulus proposed by the Bush administration is passed Feb. 15 by Congress, it is going to take some time to get into the hands of consumers.
Wall Street also is awaiting Friday’s jobs report from the Labor Department.
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