Stocks tumble ahead of Fed announcement

Stocks fell Wednesday morning as the Federal Reserve resumed its policy meeting and investors responded to outrage on Capitol Hill regarding bonus payments at bailed out insurer AIG.

The Dow Jones industrial average (INDU) was down about 100 points, or 1.3%, after 1-1/2 hours of trading. The S&P 500 (SPX) index was off 0.9% while the Nasdaq composite (COMP) retreated 0.3%.

"I think the biggest catalyst is the fact that we've been uni-directly up over the last few trading days, and now we're taking a bit of a pause," said Art Hogan, chief market analyst at Jefferies & Co. "It's natural to have a bit of a give back at some point."

Stocks rallied Tuesday after the government issued a much stronger-than-expected report on housing starts and building permits in February. It was the fifth gain in six sessions for the major indexes.

Fed: The Federal Reserve wraps up a two-day meeting Wednesday and will release a policy statement around 2:15 p.m. ET.

"We are waiting to see what the Fed's going to say," Hogan said. "We hope to get some sort of reading about how they think the economy is doing."

The central bank is expected to hold the fed funds rate, its key short-term interest rate, at zero percent. Analysts say the Fed may turn to more unconventional methods to jolt the economy since cutting interest rates is no longer an option.

Some investors think the Fed will start buying long-term U.S. Treasurys, having said at its last few meetings that it was prepared to do so. The aim is to drive down rates on other types of debt, such as some corporate debt an mortgages, that are tied to the bond market.

AIG: A House Financial Services subcommittee was meeting Wednesday to discuss the $170 billion government bailout of insurance giant American International Group (AIG, Fortune 500).

Among the witnesses slated to testify will be CEO Edward Liddy, who will face scrutiny on the controversial $165 million paid in bonuses to some of the employees whose actions led to the bailout. (full story)

In written testimony, Liddy said he found the company's controversial bonuses "distasteful," but necessary because of legal obligations and competition.

"We are meeting today at a high point of public anger," Liddy is prepared to say. "I share that anger."

IBM: Dow component International Business Machines (IBM, Fortune 500) is in talks to buy Sun Microsystems Inc. (JAVA, Fortune 500) for at least $6.5 billion, according to The Wall Street Journal. The deal could create a new powerhouse in the computer server business to challenge the dominant player Hewlett-Packard.

Sun, which makes the technology platform Java, surged 65% to $8.26 a share. Shares of IBM where down 2.5%.

Economy: Before the market opened, the government announced an increase in consumer prices for February that was slightly higher than expected.

The Bureau of Labor Statistics said the Consumer Price Index rose a seasonally adjusted 0.4% in February. The core CPI, excluding volatile food and energy prices, rose 0.2%.

A consensus of economists surveyed by Briefing.com had forecast an overall increase of 0.3%, with core CPI up 0.1%. In January, CPI was up 0.3% and the core prices were 0.1% higher.

Separately, the Mortgage Bankers Association said mortgage applications surged last week, led by a 30% increase in refinancing activity. The spike comes as rates on home loans fall near historic lows, the MBA said.

Bonds: Treasurys rose, lowering the yield on the benchmark 10-year note to 2.95% from 3.01% Monday. Treasury prices and yields move in opposite directions.

Lending rates were improved. The 3-month Libor rate fell to 1.29% from 1.3% Monday, while the overnight Libor rate was unchanged at 0.31%, according to Bloomberg.com. Libor is a bank-to-bank lending rate.

Other markets: In global trading, Asian markets advanced and European markets fell in afternoon trade.

In currency trading, the dollar fell versus the euro and the yen, but gained against the pound.

U.S. light crude oil for April delivery was down $1.36 to $47.79 a barrel after the government reported that the nation's supplies of gasoline soared last week.

COMEX gold for April delivery fell $12.20 to $904.60 an ounce.