Wall Street surges on interest rate cut

NEW YORK (AP) — A jubilant Wall Street barreled higher Wednesday after the Federal Reserve cut its benchmark interest rate by a larger-than-expected half a percentage point. The Dow Jones industrial average surged 280 points after the Fed announced its move.

Although some investors hoped for a rate cut of that magnitude, most were betting on a smaller, quarter-point cut in the federal funds rate. The Fed responded to the spreading impact of credit market problems on the rest of the economy by saying, ``the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally.''

The Fed cut the benchmark fed funds rate to 4.75 percent after keeping it unchanged for more than a year. It has not lowered this rate since 2003. It also reduced the discount rate — what it charges banks borrowing from its discount window — by half a percentage point to 5.25 percent. On Aug. 17, the central bank lowered the discount rate by a half-point to help keep cash moving in the U.S. banking system.

The central bank's decision and the wording of its accompanying economic assessment gratified a market that plunged during August amid fears that credit market tightness, spawned by a continuum of mortgage defaults and delinquencies, would send the economy toward recession.

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 Dow soared 280.61, or 2.09 percent, to 13,684.03. The blue-chip index is now only about 2.5 percent below its record close of 14,000.41 reached in mid-July.

The Standard & Poor's 500 index rose 32.44, or 2.20 percent, to 1,509.09, while the Nasdaq composite index gained 53.27, or 2.06 percent, to 2,634.93.

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.

Though Wall Street's reaction to the rate cut was clearly positive, some analysts said the Fed's reaction to the summer's market tumult may eventually lead investors to worry more about how bad the current credit climate might be, and how vulnerable the U.S. economy is.

``The market's initial response is 'Thank you, Ben,' `` Webman said. ``But we also know that when people stop and look at this, people might say, 'Could this house of cards be shaky, more than even we thought it was?'''

The dollar tumbled to a new all-time low against the euro after the rate cut, because lower rates make a currency a less attractive investment. Meanwhile, crude-oil futures catapulted further into record terrain, rising 94 cents to $81.51 a barrel, and gold prices rallied to a multi-decade high.

These factors could add up to trouble for the consumer — though the Fed tends to measure inflation with volatile food and energy prices stripped out, these high commodity costs trickle down to average Americans and can dampen their spending power.

However, the mood remained cheery on Wall Street, especially since the central bank's decision capped an already strong day that saw 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. Lehman rose $4.49, or 7.7 percent, to $63.11.

The rest of the financial sector, battered over the summer due to credit worries, also soared.

Retailers also advanced sharply, after Best Buy Co. Inc., the country's largest consumer electronics retailer said its second-quarter profit rose 8.7 percent, more than analysts expected. Best Buy rose $2.57, or 5.8 percent, to $47.11.

Meanwhile, 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 food and energy prices, rose by a mild 0.2 percent, as expected.

The Russell 2000 index of smaller companies rose 22.26, or 2.87 percent, to 798.07.

Advancing issues outnumbered decliners by about 7 to 1 on the New York Stock Exchange, where volume came to 1.01 billion shares.

In European trading, which ended before the Fed released its decision, 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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