Stocks closed moderately lower as traders remained cautious ahead of the most anticipated Federal Reserve meeting in years.
"It's been sort of a nervous Monday," said Bob Nunn, chief operating officer at Cohen Specialists. "The market wants to see a 50 basis-point cut and comments that we could see cuts in the future. I suspect we're setting ourselves up for a bit of a disappointment."
"We're waiting for the Fed's shot heard around the world," Steve Chapman, vice president at Weiss Capital Management, told CNBC.com. "I think the concern is that the market won't get what they expect and the Fed may not be as aggressive as the market wants."
Many traders saw little reason to buy, so most of the S&P 500 sectors traded lower. Energy was a winner, however, after oil prices rose above $80 a barrel. Higher oil weighed on airlines stocks. The financials sector was one of the the biggest percentage losers on continuing credit market concerns. Volume was relatively light.
"What matters is what happens after 2:15 tomorrow," Mike Larson, senior analyst for Money and Markets, told CNBC.com. "I think the Fed is really in a box here. Unfortunately, they don't have many options and the possibility that the market will be disappointed is very high."
New York light sweet crude futures closed above $80 a barrel, a new record, with traders anticipating that an interest rate cut will spur economic activity and increase demand for energy.
Credit market woes in Britain continued to hang over the markets.
European stocks closed lower as worries spread about the fate of U.K. mortgage lender Northern Rock, which requestedemergency funding from the Bank of England to stay afloat.
Depositors continued to rush to take money out of Northern Rock. Lines outside the bank's headquarters started on Friday, when news emerged that the mortgage lender was in trouble because it was getting most of its funding in the short-term credit markets.
"Northern Rock is down 30 or 40% today and it's hitting all the financials in Europe and hitting the financials here," said Sal Catrini with Bear Stearns. "People don't like to see lines at banks where people want their money."
In Asia, stocks closed broadly lower, with Japanese markets shut down for a public holiday. The bright spot was the Chinese Shanghai Composite Index, which closed over 2% up.
Looking to the economy, former Federal Reserve Chairman Alan Greenspan said his successors should act cautiously about lowering interest rates because of price-rise risks. The risk for inflation to flare up is higher now than when he was chairman, Greenspan said.
Wall Street is anxious to see if the Federal Reserve will continue to see inflation as the primary threat to the economy or if the central bank will be more concerned about slower growth.
"It's hard for me to see how the economy can continue to grow and expand effectively with the difficulty in getting access to credit on reasonable terms," former Treasury Secretary John Snow told CNBC. "This is a critical time and the risks have turned more to the negative growth side and that has to be taken into account."
With only one day before the Fed decision, analysts are scrambling to guess the size of the rate cut, with most believing the central bank will opt for a quarter-point reduction because inflationary pressures are still there.
The volatile New York Empire State Index, measuring New York manufacturing activity, fell to 14.7 in September, below consensus estimates of 18. The index fell from its August reading of 25.1.
In corporate news, a European Union court decision to uphold a 2004 European Commission decision that Microsoft had abused its dominant position weighed on the tech giant's shares. Microsoft lost its appeal of an antitrust order, which requires the company to share communications code with rivals, sell a copy of Windows without Media Player and pay a $613 million fine.
There were a few winners in the session.
Monsanto raised its 2007 earnings outlook on Monday, citing strong global corn sales, higher prices for its branded Roundup herbicides and a more favorable tax rate. Shares rose to hit a new high.
Newell Rubbermaidraised its full-year and current-quarter earnings guidance Monday, after it resolved some tax matters that resulted in a benefit of about $39 million, or 14 cents a share in the current quarter.
And negotiations between General Motors and trade unions resumed after 16-hour marathon talks. Wall Street has been optimistic that the two sides are near a critical contract agreement. GM was the biggest percentage gainer on the Dow.