Stocks Soar After Record Fed Interest Rate Cut

Tuesday, Dec 16, 2008  |  Updated 5:37 PM CDT
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Stocks Soar After Record Fed Interest Rate Cut

AP

Specialist Neil Gallagher smiles as he works on the floor of the New York Stock Exchange Tuesday, Dec. 16. A surprised Wall Street jumped Tuesday at the Federal Reserve's historic decision to further slash interest rates and pledge broad support to reinflate the troubled economy.

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A surprised Wall Street bolted higher Tuesday after the Federal Reserve's historic decision to further slash interest rates and pledge broad support to revive the troubled economy.

The Dow Jones industrials surged 360 points, or 4.2 percent, and broader indexes jumped more than 5 percent after the central bank said it will use "all available tools" to jump-start the economy. It also set its target for the rate at which banks lend to each other to a range of zero to 0.25 percent, the lowest level on record.

Demand for long-term government bonds increased and pushed yields to record lows.

The promise of further government action and a Swiss-army-knife approach for mending the economy damped concerns that policymakers were running low on tools to fan the economy by further lowering interest rates.

The idea that the Fed will likely proceed with plans to snap up government and mortgage debt made it easier for investors to place bets that the central bank will do what is necessary to help bring an end to the longest recession in a quarter-century.

"Today was a reminder that the Fed was on the case," said Jim McDonald, director of equity research at Northern Trust in Chicago. "It was a reaffirmation of their willingness to be very aggressive."

"What we heard today was not revolutionarily different but it was a reminder that they are committed to using their balance sheet to the fullest extent to repair the financial markets and stimulate the economy."

The Fed's unprecedented move to lower its fed funds target rate to a range of zero to 0.25 percent rather than a fixed point was a surprise. The move is an acknowledgment that rates in the marketplace had been well below the Fed's 1 percent target, which it set at its previous meeting on Oct. 29. The central bank also cut the lending rate for loans directly to banks.

Many analysts had expected the Fed would cut its fed funds rate to 0.5 percent from 1 percent.

"In some senses the whole point of this meeting was to say quit watching interest rates, watch the other things that we can and will do," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

Jack A. Ablin, chief investment officer at Harris Private Bank, said the fact that the Fed targeted a range for its fed fund rate indicates that policy makers did not want to bring the rate all the way to zero. Such a move could have had problematic implications for money market funds, whose fees could then outpace yields.

The Dow rose 359.61, or 4.20 percent, to 8,924.14 after having been up about 100 in subdued trading ahead of the Fed's announcement.

Broader stock indicators also rose. The Standard & Poor's 500 index advanced 44.61, or 5.14 percent, to 913.18, and the Nasdaq composite index rose 81.55, or 5.41 percent, to 1,589.89.

The Russell 2000 index of smaller companies rose 30.28, or 6.69 percent, to 482.85.

The number of stocks advancing outnumbered those declining by 5-to-1 on the New York Stock Exchange, where volume came to 1.54 billion.

Demand for government bonds surged. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.28 percent from 2.53 percent late Monday. The yield on the 30-year fell to a record low 2.75 from 2.99 percent late Monday.

Meanwhile, the yield on the popular three-month T-bill — whose yield has at times gone negative due to frenzied buying — was at 0.03 percent up from 0.02 percent late Monday.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude fell 91 cents to settle at $43.60 a barrel on the New York Mercantile Exchange.

The rate decision came on a day when investors received two more pieces of evidence on Tuesday that the economy was worsening: The Commerce Department reported a 18.9 percent drop in new home construction in November, while the Labor Department said consumer prices sank by 1.7 percent.

Richard E. Cripps, chief market strategist for Stifel Nicolaus, said the recent string of downbeat economic readings could eventually convince Wall Street that the economy has hit a bottom and could be poised for a modest recovery. In past downturns, the data remain weak long after the economy has began to recover.

"The idea is it's so bad that maybe it doesn't take much to go up from here," he said.

Wall Street remained nervous about the growing list of firms and individual investors affected by investment manager Bernard Madoff, who is accused of scamming investors.

Madoff, former chairman of the Nasdaq stock market, was arrested Thursday in what the Securities and Exchange Commission is calling one of the biggest Ponzi schemes on record. Investors of all sizes — from major banks to small charities — may record losses of more than $50 billion. Firms invested in his fund include such major European banks as HSBC Holdings PLC, Banco Santander, BNP Paribas, and Royal Bank of Scotland Group PLC.

Markets overseas were mixed. Japan's Nikkei stock average fell 1.12 percent, while Hong Kong's Hang Seng index rose 0.55 percent. Britain's FTSE 100 rose 0.74 percent, Germany's DAX index rose 1.61 percent, and France's CAC-40 rose 2.07 percent.

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