SAN FRANCISCO - U.S. stocks closed near their lows of the session Tuesday after Moody's downgraded Ireland's debt to junk status, erasing a small rally triggered by minutes of the Federal Reserve's latest meeting.
The Dow Jones industrial average, which had traded as high as 12,570.58 during the day, fell 58.88 points, or 0.5 percent, to close at a session low of 12,446.88, its lowest close since June 30.
U.S. stocks had made a brief spurt higher after minutes from the Federal Reserve's latest meeting showed a minority of members supported providing extra stimulus to the economy.
Those gains fell apart in the last hour of trading after Moody's Investors Service lowered Ireland's foreign- and local-currency government bond ratings to Ba1, or junk grade, from Baa3. Moody's said there was a "growing possibility" that after the current support program from the European Union and International Monetary Fund ends at year-end 2013, Ireland is likely to need further rounds of official financing before it returns to the private market.
The Fed's minutes from its June 21-22 Federal Open Market Committee meeting showed the central bank has largely solved how it plans to end its policy position of a target federal funds rate between 0 percent and 0.25 percent.
But members were at odds about the next step. Some said the Fed may have to turn to even more stimulative policies if the unemployment rate didn't drop by much but inflation returns to relatively low levels.
"A lot of people are reading that as QE3" -- or the third round of quantitative easing -- "is on the table," said James Dailey, chief investment officer at Team Financial Managers in Harrisburg, Pa. "Personally, I think that's premature."
Harvey Neiman, portfolio manager of the Neiman Large Cap Value Fund, thinks the Fed is adopting a "wait-and-see" attitude on the outcome of debt-ceiling and budget talks between President Obama and members of Congress before Aug. 2, when the government says it will no longer be able to pay its bills without raising the $14.3 trillion debt ceiling.
"We need some lasting solution," said Neiman. "With the deadline looming, it's hard for a rational person to be objective."
The S&P 500 index closed down 5.85 points, or 0.4 percent, at 1,313.64, within a point of session lows. Industrials and information technology led declines in the index's 10 subsectors. The S&P 500 has approximately doubled from its March 2009 lows, helped by investors' access to cheap borrowing after successive rounds of monetary stimulus from the Fed and other central banks.
The Nasdaq composite fell 20.71 points, or 0.7 percent, to close at 2,781.91.