Stocks Down on Inflation Fears; Yields Near 7%

Stocks sagged Thursday as nagging inflation worries further soured the enthusiasm over the Federal Reserve Board’s decision not to slow the economy with higher interest rates.

The Dow Jones industrial average quickly surrendered an early 19-point gain and then drifted through the session with a modest deficit, falling 32.56 points to 7,258.13.

Although major indexes fell, the Russell 2,000 list of smaller companies rose 1.40 points to 371.46, setting a new high for the first time since Jan. 22.

Most broad-market measures retreated as bond prices fell again, briefly boosting the yield on the 30-year Treasury bond above 7% before it settled at 6.99%, up from 6.95% on Wednesday.

Bonds have been struggling since Tuesday, when Fed officials opted not to raise the central bank’s lending rates. In late March, the Fed moved to ease market demand by boosting the so-called federal funds rate to 5.5% from 5.25%. That rate is a benchmark short-term interest rate for the banking system.

Although stock investors were largely relieved that rates might not rise enough to hurt company profits, many bond traders view Tuesday’s Fed decision as a delay of the inevitable.

“The bond market is saying the economic slowdown may not be sufficient to stop the Federal Reserve from raising rates in July or later,” said Rao Chalasani, chief investment strategist at Everen Securities in Chicago.

Thursday’s economic news did little to alleviate concerns that strong consumer demand will force manufacturers to raise wages--and prices--as they compete for workers.

The Labor Department reported that first-time claims for jobless benefits rose less than expected last week, leaving the overall tally in a range that still indicates a strong job market.

Rapid inflation makes fixed-income investments such as bonds less appealing. Higher interest rates can hurt company profits by slowing consumer spending.

Advancing issues outnumbered decliners by a small margin on the New York Stock Exchange, where volume was fairly light at 426.95 million shares.

Among Thursday’s highlights:

* Boeing fell 2 1/8 to 100 3/8 amid worries that European trade officials will succeed in blocking the aircraft maker’s acquisition of McDonnell Douglas.

* RCSB Financial rose 6 to 40 following an announcement that it will be acquired by Charter One Financial in a $635-million stock deal.

CFM Technologies fell 9 3/8 to 28 after the company said aggressive pricing will hurt its results for the remainder of the year.

* Initial offerings enjoyed success. Hartford Life surged 3 7/8 to 32 1/8, a day after raising $655.6 million by selling 23 million shares. Summit Holding Southeast rose 3 1/8 to 14 1/8 after selling 5 million shares to the public.

* Ford Motor fell 1/8 to 37 1/8 after the auto maker said it is comfortable with analysts’ average earnings estimate of $1.70 a share in the second quarter, even as sales have declined in recent months. Shares of the company reached a record 37 5/8 on Monday.

Credit Suisse First Boston reduced Ford’s investment rating to “hold” from “buy.”

* Barnes & Noble rose 7/8 to 42 1/4 after the bookseller said it lost 12 cents in the first quarter, less than the 14 cents expected by analysts.

* Sunglass Hut International rose 1/16 to 7 3/16 after reporting it earned 1 cent a share in the first quarter, half what analysts expected.

Overseas, Tokyo’s Nikkei stock average rose 0.2%, Frankfurt’s DAX index fell 0.5% and London’s FTSE-100 rose 0.2%.

The dollar rose nearly 2 yen on comments by Japanese finance officials.

Finance Minister Hiroshi Mitsuzuka said interest rates won’t be rising in Japan for a while, confirming currency traders’ sense that the nation wants the rapid appreciation of the yen to ease.

“They did reaffirm the low interest rate policy and their comments to limit volatility gave the dollar a floor,” said Robert Katz, a currency trader at MTB Bank Corp. in New York.

Coffee prices continued to rise as speculators pushed futures prices to new life-of-contract highs before profit taking trimmed gains.

At the Coffee Sugar and Cocoa Exchange in New York, coffee for July delivery closed at 260.30 cents, up 7.20 cents.

The July contract was up about 20 cents since Tuesday.

The latest surge in prices is tied to news on Wednesday that coffee-producing nations will continue to limit their shipments to a set quota until July 1998, providing no increase in supply from the current year despite high prices.