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Wall Street delighted by aggressive rate cut
Fed says its half-percentage point move to ward off economic frailty
 | Traders on the floor of the New York Stock Exchange watch the news of a bigger-than-expected rate cut from the Federal Reserve. |
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 | CNBC video |
 | Market mavens on the Fed’s rate move Sept. 18: Leading investment fund managers Bill Gross and Ken Volpert discuss the Federal Reserve’s decision to cut interest rates on CNBC Tuesday. CNBC |
NEW YORK - A jubilant Wall Street surged Wednesday, chalking up its best one-day rally this year, after the U.S. Federal Reserve delighted investors by cutting its benchmark interest rate by a larger-than-expected half a percentage point.
The Fed’s decision to cut its federal funds rate, which came shortly after 2:15 p.m. ET, was widely expected, but most on Wall Street were betting on a smaller quarter percentage-point cut in the key interest rate at the conclusion of the Fed’s policy meeting Tuesday.
But the central bank’s decision and the wording of its accompanying economic assessment boosted a market that plunged during August amid fears that credit market problems, spawned by a continuum of mortgage defaults, would send the economy toward recession.
Stocks prices surged as the Fed’s aggressive rate cut, which will lower borrowing costs, gave relief to investors worried that the housing and credit market turmoil could spread to the broader economy. It was the first cut in the federal funds rate in more than four years, and analysts said it was a forceful move by the Fed against possible further weakening in the economy.
“I think the Fed was just trying to make a point, to create some liquidity and ease things for everybody from the consumer to the guy trying to sell his house,” said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Ark.
The Dow Jones industrial average racked up its biggest one-day rally in years, closing the day up 336 points, or 2.5 percent, while the broader Standard & Poor’s 500-stock index surged 43 points, or 2.9 percent, and the Nasdaq composite index jumped 70 points, or 2.7 percent.
Diversified financial companies, whose profits benefit from lower interest rates, were among the top gainers on Wall Street, along with industrial stocks, which are sensitive to the economy’s strength.
Bonds extended their declines after the announcement as investors pulled their money out of the safe government securities and shifted it into stocks. The yield on the benchmark 10-year Treasury note rose to 4.52 percent from 4.47 percent late Monday. Bond prices move opposite their yields.
In a statement accompanying its decision, the Fed said it was responding to the spreading impact of credit market problems on the rest of the economy, noting that “the tightening of credit conditions has the potential to intensify the housing [market] correction and to restrain economic growth more generally.”
In its statement the Fed also said “today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”
There was no direct signal in the Fed’s statement that it would make further rate cuts. It said “some inflation risks remain” and that it will keep monitoring inflation developments. Still, it did not call inflation its “predominant policy concern” as it did after holding rates steady in early August.
“What it says to me is you had a major shift in the last couple of months from a Fed that was very concerned about inflation to one that is concerned about the health of the financial markets, the availability of liquidity,” said Jerry Webman, chief economist at Oppenheimer Funds Inc.
The Fed cut the benchmark federal funds rate to 4.75 percent after keeping it unchanged for more than a year. It has not lowered rates since 2003.
Earlier, as investors awaited the central bank’s decision, they bid stock prices up sharply, pleased to see economic and corporate data come in better than expected.
Lehman Brothers Holdings Inc., the nation’s fourth-largest investment bank, posted a smaller-than-anticipated 3 percent decline in its third-quarter profits compared with a year ago. Lehman is the first of the major U.S. brokerages to report earnings from the most recent, tumultuous quarter. Other banks are due to report later in the week.
The Labor Department’s August producer price index was also more favorable than the market predicted. Wholesale prices fell 1.4 percent last month, the biggest decline in 10 months and led by a 6.6 percent drop in energy costs. Core inflation, which eliminates often volatile food and energy prices, rose by a mild 0.2 percent, as expected.
“All of the cards have fallen nicely into alignment this morning,” said Phil Orlando, chief equity market strategist at Federated Investors, pointing to Lehman’s earnings, the benign PPI, and a calming third-quarter earnings outlook from Bank of America late Monday.
Investors seemed little-moved by the National Association of Home Builders report that its index of future home sales fell in September to a level equal to its all-time low, as expected. The index, which tracks how developers expect the housing picture will play out over the next six months, indicated weakness in the housing market could last into early next year.
Lehman rose $3.98, or 6.79 percent, to $62.60 after releasing higher-than-expected earnings.
In other positive earnings news, Best Buy Co. Inc., the country’s largest consumer electronics retailer, said its second-quarter profit rose 8.7 percent, more than analysts expected, thanks to strong revenues overseas and tighter controls on spending.
Best Buy rose $2.55, or 5.73 percent, to $47.09.
The price of crude oil surpassed $81 a barrel Tuesday on the New York Mercantile Exchange and closed up 94 cents at $81.51.
Though the effect of high oil prices on the U.S. consumer is a concern — especially given that the dollar is near record lows versus the euro — the Fed tends to measure inflation with food and energy prices stripped out.
In European trading, Britain’s FTSE 100 closed up 1.63 percent, Germany’s DAX index rose 1.27 percent and France’s CAC-40 rose 2.02 percent. In Asia, Japan’s Nikkei index fell 2.02 percent and Hong Kong’s Hang Seng Index fell 0.09 percent.
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