Stocks waver ahead of Fed's decision

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By Associated Press

NEW YORK (AP) — Investors held back from making big moves in the stock market Tuesday as they waited to see if the Federal Reserve might take new actions to stimulate the economy.

The uncertainty has put a big September rally on hold before the central bank's meeting wraps up Tuesday afternoon.

The Dow Jones industrial average fell 6.66, or 0.1 percent, to 10,746.96 in midday trading, a day after closing at a four-month high. The Dow has risen 12 of the past 14 days and is up more than 7 percent for the month.

The Standard & Poor's 500 index slid 2.55, or 0.2 percent, to 1,140.16, while the Nasdaq composite index fell 6.07, or 0.3 percent, to 2,349.76.

Stocks have rallied throughout the month on signs that the economy continues to grow, even though the expansion remains sluggish. In the latest signal, the Commerce Department reported that construction of homes and apartments rose last month to the highest level since April.

Because the U.S. economy is still wobbly, some traders anticipate the Fed might at least hint at restarting programs like buying Treasurys and mortgage bonds to keep borrowing costs low.

"I think they're going to move toward more stimulus," said James Dailey, portfolio manager of the Team Asset Strategy Mutual Fund. "I wouldn't be surprised if they announce something, but it would probably be incremental."

A small increase in purchases of bonds is a more likely scenario than a sweeping new program because the stock market has surged this month and economic reports show continued modest growth, Dailey said.

Paul Zemsky, head of asset allocation at ING Investment Management, said if the Fed doesn't make any move that would mean the central bank is more upbeat about the economy than it has been recently, but that might not be enough to keep stocks from falling.

"The history has been the market follows the action (of the Fed), not what they say," Zemsky said. "So if the expectation is for action and we don't get that today, we might get a bit of a pullback."

Stocks have rallied throughout September, confounding predictions of a slump, as fears ebbed that the U.S. economy would fall back into recession.

If the Fed resumes buying bonds, interest rates could fall even lower, potentially driving investors seeking income to dividend-paying stocks. Investors can already get more dividend income from holding shares of major companies like Intel Corp., General Electric Co. and Home Depot Inc. than they can from the 10-year Treasury note.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 2.68 percent from 2.70 percent late Monday.

The 10-year Treasury yield is often used to help set interest rates on mortgages and other kinds of loans. So if the Fed announces actions that drive down yields on the 10-year note, interest rates are likely to fall even further. But lower interest rates won't necessarily drive more people to take out loans to buy homes. A weak housing market has been blamed as one of the main culprits from keeping the economy from growing faster.

"If they were somehow to manipulate rates, it doesn't help one iota," said Leif Thomsen, CEO of Mortgage Master Inc. "They're already historically low and coupled with the lowest prices in six or seven years, lowering (rates) will not help."

The dollar fell against other major currencies, while gold prices continued to hover near record highs.

About three stocks fell for every two that rose on the New York Stock Exchange where volume came to 321.8 million shares.