Wall Street calmer on Tuesday

A sense of calm returned Tuesday to Wall Street, leaving weary investors wondering whether it was a return to normalcy or the eye of the storm, even as the day featured the best inflation report in two years and the Federal Reserve chose not to change its benchmark lending rate.

Consumers had reason to cheer as oil prices continued their steep decline, raising the possibility of $3.00 a gallon gasoline in the weeks ahead. Oil prices fell $4.56 to settle at $91.15 on the New York Mercantile Exchange. That's far off the July high of $147 a barrel, and for consumers it means more cash in the wallet soon.

Falling energy prices will do more than lower the cost of gasoline and home heat. They'll also lower the costs of production for farm products and manufactured goods, and that eventually will drive down a two-year rise in inflation that's weakened consumer spending.

Over the past 12 months, thanks to rising energy prices, consumer inflation advanced at an annual pace of 5.4 percent, and 7.2 percent over the past three months. In August, food prices rose 0.8 percent, and 9.6 percent over the past three months.

But on Tuesday, the Labor Department reported that consumer prices fell last month — by 0.1 percent — for the first month since October 2006, a minimal drop but a decline nonetheless. “Virtually all of the inflation indicators are on the wane: Labor markets are weak and compensation gains slight, inflation expectations are flagging and energy prices continue to fall,” Kenneth Beauchemin, an economist with forecaster Global Insight, said in a note to investors. Tuesday's “report grants the Fed more latitude to wield the federal funds rate instrument to address continued credit market strains if it deems appropriate.”

On Tuesday, the Fed didn't do so. Its rate-setting Open Market Committee left its benchmark fed funds rate at 2 percent, where it's been since April.

Wall Street had hoped for a quarter-point interest rate cut to support sagging financial markets; floor traders booed after the decision was announced. The Fed didn't signal the possibility of a future rate reduction despite growing fears that Wall Street's turmoil, the banking credit crunch and declining home prices are pushing the economy into recession. The absence of Fed action may have signaled confidence that the economy isn't as endangered as Wall Street fears.

Stocks moved up more than 120 points on the Dow Jones industrial average shortly after the Fed's decision. A day after falling 504 points, the Dow finished up 141.51 points to 11,059.02 on Tuesday, while the S&P 500 finished up 20.90 points to 1213.60 and the Nasdaq gained 27.99 to close at 2207.90.

“Strains in financial markets have increased significantly,” the Fed statement said, offering little insight into what it intended to do about them. Some financial analysts took that to mean that the Fed was separating Wall Street's problems from Main Street's.

“In doing so, the Fed made clear its desire, to the extent possible, to separate its monetary policy decisions from the circumstances surrounding particular financial institutions,” Peter Kretzmer, a Bank of America economist, wrote in a note to investors. “Notably, the Fed made only slight changes to its August monetary policy statement, maintaining a balanced view of the risks facing the economy despite the large recent events in financial markets.”

Markets around the world have been reeling this week from the bankruptcy filing of Lehman Brothers Holdings Inc. and the quickly assembled weekend sale of Merrill Lynch to Bank of America. Investors worry that tectonic shifts in the power structure of Wall Street signal that the financial sector's troubles are far from over.

Overseas, markets in Asia fell sharply Tuesday after being closed Monday. Japan's Nikkei stock average fell 4.95 percent. Hong Kong's Hang Seng index lost 5.44 percent.