Banks and other stocks fell along with the bond market on Friday after the Commerce Department reported a strong rise in consumer spending in June.
The data fueled fears that the Fed may not lower rates further this summer despite other signs that the economy remains weak and could even slip into recession.
The central bank lowered its target rate for overnight interbank loans to 5.75% from 6% on July 6. It was the first cut in nearly three years and came after a series of increases last year. The action prompted banks to cut their prime lending rate to 8.75% from 9%.
The government reported a 0.7% increase in retail sales in June, in contrast to Wall Street's expectation of a 0.5% rise. Sales figures for both May and April also were revised upward.
Some economists cautioned, however, that the new data could be misleading.
"The bulk of the strength was in automotive sales, where you have had very heavy price cutting," said Lacy H. Hunt, an analyst with HSBC Markets Inc., New York. "Distressed summer sales of goods is not a very good measure of the economy. Price cutting itself indicates that fundamental demand is weak.
"This sort of activity corrects inventories in the short term, but it effectively pulls sales away from the fourth quarter and the 1996 model year. In effect, it amounts to borrowing (consumer) demand from the future, and puts the fourth quarter in question."
While the near-term risk of recession is lessened by such price cutting, Mr. Hunt said, "it doesn't mean that the consumer is fundamentally sound or in a position to buy.
"Consumer installment debt in relation to disposable income is at its highest level since the peak in late 1989," he noted.
Mr. Hunt said he believes economic growth was "slightly negative" in the second quarter and will be marginally positive in the third quarter. The fourth quarter, he said, looks "very iffy."
The economist said the Fed's movement to ease credit may be set back by the sales figures, but he still expects lower rates by yearend, with a federal funds rate of 5% to 5.25% by then.
Other economic data released Friday was considerably more benign.
The Fed said the nation's industrial production rose 0.1% during June, seasonally adjusted, after three previous months of declines. The central bank said the June picture was "little changed," with strength in some sectors offset by weaknesses in others.
Meanwhile, price inflation appears to have peaked. The Labor Department said the consumer price index rose 0.1% in June. The figure was lower than anticipated on Wall Street, following a day after a report that the producer price index fell 0.1% in June. It was the second successive month of no inflation in finished goods that are about to reach consumers.
