Stocks Resume Tuesday's Steep Decline As Fed Official Warns

NEW YORK (MarketWatch) -- U.S. stocks on Wednesday scaled back gains as Philadelphia Federal Reserve President Charles Plosser spoke against overly aggressive rate cuts, with the talk dampening a rebound from the market's largest single-day plunge in nearly a year.

Up more than 100 points during the session, the Dow Jones Industrial Average fell into negative territory after Plosser warned against easing rates too quickly, saying it would only fuel inflation down the road. .

"The sense from his remarks is that he wants to have time to observe the impact of past rate cuts and that he is wants to be sure that the Fed keeps its eyes on inflation even though economic growth has slowed," said Tony Crescenzi, bond market strategist at Miller Tabak & Co.

On Tuesday, Richmond Federal Bank chief Jeffrey Lacker became the first Federal Reserve official to say publicly that the nation's economy is at risk of recession.

With less than an hour to go, the Dow was up 6.5 points at 12,271.6, with 15 of its 30 components trading higher, led by Walt Disney Co. , up 4.9% after the media and entertainment giant reported first-quarter profits fell 27% from the year-ago period, results that topped expectations.

The Dow's decliners included General Motors Corp. , recently off 2%, after its downgrade to underperform by Bear Stearns, which also lowered its rating on Ford Motor Co. to peer perform, citing worries over consumers' ability to buy cars and trucks. Ford's shares also traded lower.

The S&P 500 fell 3.46 points to 1,333.18 and the technology-heavy Nasdaq Composite shed 11.78 points to 2,297.79.

"The biggest driver today is a snapback from the larger than necessary reaction to yesterday's economic data," said Art Hogan, chief market strategist at Jefferies & Co., of Tuesday's report, which had service-sector activity in January hitting its lowest level since 2001.

"In reality, what the market is doing is pricing in the worst-case scenario, and sometimes we overshoot, today is what I like to call backing and filling," said Hogan.

The tech sector had been bolstered in part by expectations for the post-close earnings report from Cisco Systems Inc. , shares of which were recently up 1%.

Shares of Yahoo Inc. edged lower, down 1%, with the Internet giant's board still considering a $44.6 billion bid from Microsoft Corp. . .

Volume on the New York Stock Exchange hit 1.1 billion as declining stocks ran just ahead of those advancing. On the Nasdaq, nearly 1.8 billion shares changed hands, with declining stocks ahead of advancers 8 to 7.

Earlier, the Labor Department estimated productivity growth in the nonfarm business sector slowed to a 1.8% annual rate in the fourth quarter from 6% in the third. .

"This data suggest that, in the near term, falling productivity should not be a source of inflation concern for the Fed," said Drew Matus, economist at Lehman Brothers.

On the New York Mercantile Exchange, gold futures rose sharply to close above $900 an ounce, with gold for April delivery surging $14.70, or 1.6%, to end at $905 an ounce. .

And in the energy pits, crude-oil futures held steady near $88 a barrel, with crude for March delivery off $1.46 at $86.95 a barrel. .

Housing's unending toll

Toll Brothers Inc. drew scrutiny, saying it doesn't see an end to the U.S. housing market's woes. The luxury home builder reported home-construction revenue fell 22% in the first quarter. .

"Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel," said Robert Toll, chairman and chief executive.

The Mortgage Bankers Association reported applications for mortgages rose a seasonally adjusted 3% last week compared with the previous week. .

Besides Disney, other financial results included a drop in fourth-quarter net income for media and entertainment mainstay Time Warner Inc. , share of which gained 2.7%. .

Overseas, concerns about the U.S. economy fueled heavy losses in Asia. .

In Europe, stocks advanced amid a raft of bid speculation. .

U.S. stocks plunged on Tuesday, with the Dow industrials tumbling to their biggest drop in 11 months, after a key service-sector gauge contracted in January, another signal that a U.S. recession may be at hand.

By Kate Gibson