NEW YORK - Stocks plunged yesterday after the Federal Reserve lowered interest rates by a quarter of a percentage point, disappointing investors who had hoped that the central bank would move more aggressively to help the economy overcome the credit and mortgage crisis. The Dow Jones industrial average skidded more than 290 points.
Investors had been expecting policymakers to lower rates for a third straight time, although there was debate over the size of the cut. Most economists anticipated a quarter-point reduction in the benchmark federal funds rate to 4.25 percent, but some investors were hoping for a half-point cut.
Fed officials did signal that further cuts were possible if the severe downturn in housing and crisis in mortgage lending worsened, but that was not enough to assuage the market.
The Dow fell 294.26, or 2.14 percent, to 13,432.77. The Standard & Poor's 500 index fell 38.31, or 2.53 percent, to 1,477.65; and the Nasdaq composite index fell 66.60, or 2.45 percent, to 2,652.35.
The Fed's rate decision and Wall Street's disappointment followed further word of trouble in the banking sector. Washington Mutual Inc. became the latest lender to resort to a massive stock sale to shore up its finances. WaMu's plan to sell $2.5 billion worth of convertible preferred stock followed a move by Switzerland-based UBS AG to sell $11.5 billion in shares to Singapore's sovereign-wealth fund and an unidentified Middle Eastern investor.
Some of the market's recent concern has stemmed from problems at global banks, including Washington Mutual, said MF Global Ltd. fixed-income analyst Jessica Hoversen.
"Sovereign-wealth funds are trying to bail out the financial sector, but they're coming in at vulture prices," she said. "That, I think, is a big issue for the market. While they want to believe there is still value in the financial sector, we've come a long way down."
Washington Mutual shares fell $2.46, or 12.37 percent, to $17.42 after the largest U.S. savings and loan also said it would close offices, lay off more than 3,000 workers, and slash its dividend. And the bank set aside up to $1.6 billion for loan losses in the fourth quarter.
In other corporate news, Citigroup Inc. named Vikram Pandit, the head of its investment-banking business, as its chief executive officer, charging him with restoring the bank's profitability and reputation after missteps in lending and investing left Citi with billions of dollars in losses this year. Citi fell $1.54, or 4.43 percent, to $33.23.
General Electric Co., which like Citigroup is one of the 30 stocks that make up the Dow industrials, issued a 2008 forecast that disappointed investors. The conglomerate projected earnings of $2.42 a share and revenue of $195 million. GE fell 38 cents to close at $37.03.
AT&T Inc. rose $1.56, or 4.12 percent, to $39.46 after the telecommunications company said it would buy back 400 million shares and raise its dividend 12.7 percent. The buyback represents about 7 percent of the company's stock and will be completed by the end of 2009.