(Updates to close, changes byline)
* Fed warns of higher inflation, slower growth
* Oil extends rise 3.3 percent as inventories fall
* Airline stocks fall sharply on oil rise, Boeing comments
By Kristina Cooke
NEW YORK, May 21 (Reuters) - U.S. stocks tumbled on
Wednesday, posting their biggest losses in two weeks, amid
fears the U.S. economy faces 1980s-style stagflation after the
Federal Reserve slashed its economic growth forecasts while
raising estimates for inflation.
Further fueling market concerns, oil prices surged further
into uncharted territory, soaring over $4 a gallon, or 3.25
percent, to a record high close at $133.17, after U.S.
government report showed a surprise drop in crude stockpiles.
Boeing's <BA.N> chief executive added to oil-related
jitters after he said oil prices are crimping airlines' growth.
The aircraft maker's shares were the top drag on the Dow Jones
industrials and an index of airline stocks <.XAL> shed 11.95
percent.
The Fed's warning on Wednesday led to a 2.6 percent fall in
the S&P financials sub-index <.GSPF>, its biggest drop in a
month. The S&P financial sub-index is now 30 percent below its
record high set a year ago.
In addition to its forecast on the economy, the Fed
released the minutes from its last policy meeting, which
signaled the central bank was unlikely to cut U.S. interest
rates any time soon.
"The clear terminology about growth and inflation in the
Fed's comments is like a bucket of cold water," said Peter
Kenny, managing director at Knight Equity Markets in Jersey
City, New Jersey.
"The last period we had a sustained period of stagflation,
the only way we got out of it was through aggressive rate hikes
that shocked the system. The fact rates will have to go up is
what people are worried about," he added.
The Dow Jones industrial average <> fell 227.49 points,
or 1.77 percent, to close at 12,601.19, while the Standard &
Poor's 500 Index <.SPX> dropped 22.66 points, or 1.60 percent,
to 1,390.74. The Nasdaq Composite Index <> lost 43.99
points, or 1.77 percent, to 2,448.27.
Boeing's chief executive's remarks followed AMR Corp's
<AMR.N> American Airlines saying it would slash domestic
capacity in the face of soaring fuel prices.
Among major U.S. airlines, shares of Continental Airlines
<CAL.N> dropped 13.15 percent to $14.20 after a brokerage
downgraded the U.S. airline sector. AMR shares fell more than
24.15 percent to $6.22 on the NYSE.
Shares of Moody's Corp <MCO.N> slid 15.92 percent to $36.91
after it launched an investigation into a report that it had
wrongly assigned triple-A ratings to complex European debt
products.
Trading was light on the New York Stock Exchange, with
about 1.36 billion shares changing hands, below last year's
estimated daily average of roughly 1.9 billion, while on
Nasdaq, about 2.16 billion shares traded, also below last
year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones by a ratio of
about 2 to 1 on the NYSE and Nasdaq.
(Editing by Gary Crosse)
