U.S. Stocks Fall After Fed Officials Say Rates May Need to Rise

Most U.S. stocks fell, erasing a 0.7 percent rally in the Standard & Poor's 500 Index, after Federal Reserve officials said higher interest rates may be needed to curb inflation.

Washington Mutual Inc., National City Corp. and Fannie Mae led bank stocks in the S&P 500 to the lowest level since April 2003 after New York Fed Bank President Timothy Geithner said there have been ``very large sustained'' price increases around the world. Apple Inc. slid to a two-week low on concern its next iPhone faces delays.

The S&P 500 lost 6.18 points, or 0.5 percent, to 1,354.5 as of 2:08 p.m. in New York, extending its steepest decline since February. The Nasdaq Composite Index decreased 36.01, or 1.5 percent, to 2,438.55. The Dow Jones Industrial Average added 22.31, or 0.2 percent, to 12,232.12 after earlier climbing 122 points. About two stocks decreased for each that gained.

``The Fed is done lowering rates, and they've spent the time since the last meeting communicating that to the market,'' said Joseph Keating, the Birmingham, Alabama-based chief investment officer of RBC Bank Private Asset Management, which oversees about $3 billion. ``That begs the question `When are they going to raise?'''

Futures trading showed a 42 percent chance of an increase in the Fed funds target rate by mid-September, up from 26 percent in the previous session. The S&P 500 has dropped 7.9 percent since September when the Fed made the first of seven interest rates cuts that have lowered the overnight lending rate between banks 3.25 percentage points.

Rout Extended

The Dow industrials lost 395 points, or 3.1 percent, on June 6 following a jump in the unemployment rate and a $10-a- barrel rise in crude oil. The S&P 500 also retreated, trimming its rally from a 19-month low in March to 6.9 percent.

Washington Mutual, the biggest U.S. savings and loan, lost 87 cents, or 12 percent, to $6.66. The company's mortgage-related losses will be about $21.7 billion through 2011, compared with the $12 billion to $19 billion the company forecasts, UBS AG analyst Eric Wasserstrom wrote in a report. He cut his 12-month share price target to $8.50 from $11.

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post losses of $10 billion on bond insurance after MBIA Inc. and Ambac Financial Group Inc. lost their top credit ratings, Oppenheimer & Co. analyst Meredith Whitney said.

Bond Insurers

MBIA and Ambac, the world's largest bond insurers, had their AAA ratings cut two levels by Standard & Poor's June 5, which trimmed ratings on more than $1 trillion of securities they guaranteed. The downgrades may limit the so-called monoline insurers' ability to write new policies, putting further pressure on earnings, Whitney wrote in a note to investors.

Merrill lost $1.55 to $37.47 and UBS retreated 93 cents to $22.98.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, reported a record $2.8 billion second-quarter loss and said it will raise $6 billion in capital in a public offering. Stocks in Europe and Asia dropped as investors speculated bank losses will increase.

Lehman dropped $3.79 to $28.50. A gauge of financial stocks in the S&P 500 lost 2.3 percent after earlier rising 0.8 percent.

Geithner told a New York audience that ``tighter monetary policy'' may be needed globally. Richard Fisher, president of the Fed Bank of Dallas, said he agreed.

``It's something that I think a lot of monetary authorities will have to come to grips with,'' Fisher said of inflation during an interview with CNBC today. ``The question is how and when.''