Bank stocks led the market lower after the Federal Reserve cut its economic forecast and said unemployment could get worse.
The Fed's prediction Wednesday that the jobless rate could approach 9.6% -- worse than its previous forecast of 8.8% -- was especially ominous for banks since that figure is a component of the government's recent "stress tests" designed to assess the health of the nation's 19 largest banks.
The midafternoon release of minutes from the Fed's meeting deflated an earlier rally in financial shares, which had been rising after Bank of America said it raised $13.5 billion in a share offering. That put the bank more than halfway toward raising the capital it needs as determined by the stress test results that were announced two weeks ago.
The sharp swings in financial shares have been a typical market pattern in recent weeks as investors rush into and out of bank stocks based on the latest thinking about how well the industry will endure the economic slump and a credit crisis that brought down three Wall Street investment banks.
In other sectors, energy stocks surged as oil topped $62 a barrel for the first time since November, and Treasury prices rose smartly after the Fed said it might increase its purchases of government debt.
Carl Beck, a partner at Harris Financial Group in Richmond, Va., said the Fed's new estimate for unemployment was much closer to the "worst-case scenario" the government used in its bank stress tests.
"Does that mean there is a worse-case scenario than that?" Beck said. "I don't think after what we've seen over the last six to eight months that you can discount anything at this point."
The Dow Jones industrials fell 52.81, or 0.6%, to 8,422.04. The blue chips had been up as much as 117 points in early trading. The Standard & Poor's 500 index slipped 4.66, or 0.5%, to 903.47, and the Nasdaq composite index fell 6.70, or 0.4%, to 1,727.84.
BofA was the only major bank to get through the downdraft in financial shares, ending up 24 cents, or 2.1%, at $11.49. Regional bank Regions Financial fell 35 cents, or 6.7%, to $4.89 after announcing it had raised $1.25 billion to meet the government's demands to shore up its balance sheet.
Energy stocks posted some of the day's biggest gains. Marathon Oil rose 68 cents, or 2.3%, to $30.38. Schlumberger rose $1.03, or 2%, to $55.04.
