Though the Federal Reserve raised short-term interest rates yesterday – for the 16th straight time – it wasn't rising rates that spooked the markets this morning. Instead, it was rising prices for crude oil and gold.
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The Dow Jones industrial average fell more than 120 points early this afternoon, reducing the likelihood that the Dow will set a new all-time record high this week.
The Nasdaq composite index also tumbled, by more than 30 points this morning, as investors seem to be taking some of their first-quarter profits off the table.
The major problem this morning was oil. Crude oil futures contracts jumped to nearly $74 a barrel this morning amid continuing concerns about global supplies.
Oil prices have of course been high for some time. And high energy prices have had "only a modest effect on core inflation" so far, according to the Federal Reserve. But there is a lag time between rising energy costs and their eventual impact on the economy, economists note. And many on Wall Street fear that the economy will eventually slow as a result of higher energy costs.
In addition, investors fear that rising energy costs could also be inflationary. This is particularly worrisome, given that gold prices shot up to nearly $730 an ounce this morning, which marks a new quarter-century high.
Investors tend to flock to gold when they fear the diminishing purchasing power of U.S. dollars. This could happen as a result of a falling dollar in the global currency markets. But it might also be the result of rising consumer prices.
The bottom line: Stock investors hate inflation, but they hate inflation more when it rears its ugly head amid a slowing economy.
