Stocks closed broadly lower on Wednesday as investors' hopes for a cut in interest rates diminished following the release of minutes from the Fed's policy meeting three weeks ago.
"I think what the market wanted to hear was that the Fed was looking to come to the rescue and add liquidity to the system, as they seemed to tip their hat to in the last FOMC announcement," Kevin Caron, market analyst at Ryan Beck & Co., told CNBC.
Minutes from the Federal Open Market Committee's meeting confirmed that inflation, rather than an economic slowdown, remains the central bank's chief concern.
The Dow Jones Industrial Average snapped a streak of eight straight gains as cost-cutting moves announced by Citigroup and a negative forecast for the real estate market also weighed down stocks.
Robert Pavlik, chief investment officer at Oaktree Asset Management, said the minutes prompted investors to take back the gains made in late March since the Fed's "hands are basically tied" in terms of interest rate policy amid stubborn inflation.
"Investors are looking for the Fed to bail out the markets but they can't do anything right now," Pavlik said. "The market certainly didn't like it, but I think what came out was not all that unexpected."
The FOMC said "further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming."
Breadth was negative on the NYSE with decliners outpacing gainers by more than two to one. All 10 sectors in the S&P 500 closed in negative territory as technology and telecom stocks were the worst sector performers. Just five of the 30 Dow components closed higher as General Motors, Wal-Mart Stores and IBM were among 11 Dow stocks ending down 1% or more.
"The market rose in anticipation of good earnings numbers but those numbers might be a little guarded," said Joe Battipaglia, chief investment strategist at Ryan Beck & Co. "You had a fast selloff in February and then meaningful recovery but it wouldn't surprise me if the markets drifted lower for the next month or so."
Citigroup announced job cuts of 17,000 employees worldwide as the company, but analysts debated whether the nation's largest financial company's restructuring plans will be enough for it to achieve its goal of $4.6 billion in savings by 2009.
"I thought it was a pretty timid move for a company that likely has to do more," Alan Skrainka, chief market strategist at Edward Jones, told CNBC.com. "They are really not aggressively addressing expenses."
Homebuilding stocks such as Lennar and Pulte Homes closed lower on Wednesday after the National Association of Realtors slashed its 2007 forecast today, now predicting a decline in median home prices, an event not seen since the 1960s.
KB Home added to negative industry sentiment after the company said late Tuesday it does not expect the housing market to bottom any time soon.
Volatile trading in energy commodities also weighed on the major market indexes as gasoline futures closed at an eight-month high following an unexpected drawdown in weekly inventories. Gasoline stockpiles fell 5.5 million barrels, more than four times analysts' expectations, triggering supply concerns ahead of the summer driving season.
New York light sweet crude futures ended a wild trading session slightly higher as weekly crude inventories rose by 700,000 barrels, compared with the analysts' forecast for a rise of 1.6 million.
IBM shares weighed on the tech sector as investors took positions ahead of the company's quarterly earnings report set for next Tuesday.
Shares of Dow component Alcoa reporting a first-quarter profit ahead of expectations, helped by higher metal prices and strong sales.
Shares of BlackBerry handheld device maker Research In Motionand biotech giant Genentech both traded down ahead of quarterly earnings reports.
Treasury prices were higher, sending yields lower.
Europe Sees Further Gains, Asia Mixed
European stock markets rose Wednesday as mergers and acquisitions news drives the major European indexes.
The London FTSE-100, , Paris CAC-40 and Frankfurt DAX all traded higher.
Investors were somewhat cautious ahead of a central bank decision on interest rates expected Thursday. A consensus of economists expect the policymakers to keep rates steady at 3.75%.
Two leading Italian banks were in talks to buy a stake in Telecom Italia's largest shareholder, Olipmia, shortly after AT&T and America Movil expressed interest.
In Germany sportswear maker Puma prepared to hold its general meeting, which investors will be closely watching to gain clues on its agreed $7.1 billion merger with French retailer PPR.
And the ongoing battle for U.K. food retailer J. Sainsbury saw the original list of suitors reduced to just CVC, according to the Financial Times. Blackstone and Texas Pacific Group pulled out of the takeover consortium as the bid ran up against opposition from the family that owns Sainsbury.
In the currency market, the euro hit a record high against the yen Wednesday as economists expected the European currency's rate advantage over the yen to widen.
Tokyo finished flat after weak manufacturing data cast doubt on capital spending. A steeper-than-expected drop in Japan's core machinery orders, along with gains in U.S. Treasuries, helped lift Japanese bonds off of a three-month low.
Japan's Nikkei 225 Average closed little changed as investors sold shares of Fanuc and other machine makers following downbeat machinery orders data, offsetting gains in property and other domestic demand-related stocks.
South Korea's Kospi Index finished at a record close for the sixth straight session as LG.Philips LCD enjoyed its biggest gain in more than two years after positive guidance shored up confidence in the beleaguered tech sector.