In Another Milestone, Dow Closes Above 2,900 : Markets: Hopes for lower interest rates drove stocks and bonds higher. Experts expect a healthy Wall Street rally this summer.

Renewed hopes for lower interest rates rallied stocks and bonds Friday, enabling the Dow Jones industrial index to close above 2,900 for the first time.

The key indicator of market activity closed at 2,900.97, up 24.31 in heavy trading. Volume on the New York Stock Exchange rose sharply, with 189.9 million shares changing hands, compared to 165.7 million on Thursday.

Stocks could rise as much as 10% more before the rally fades later this, several market experts predicted.

“The fundamentals are all falling into place for a terrific summer rally,” said Peter J. Canelo, chief investment strategist at Bear, Stearns & Co. in New York. “We are looking for the market to reach the 3,200 area by the second half of the year.”

Added Geraldine Weiss, editor of Investment Quality Trends in La Jolla: “The scent of lower interest rates has pulled a lot of the money from the sidelines. That’s fuel. Now that we are in new high ground, the rally will continue.”

Meanwhile, bond yields fell precipitously as bond prices rose. Yields on the benchmark 30-year Treasury bond fell to 8.45% from 8.57% on Thursday. The yield on the 10-year note slipped to 8.46% from 8.58%, and the one-year Treasury bill rate dropped to 7.5% from 7.66%.

The day’s gains were spurred by several economic reports that indicated the economy had slowed dramatically. Market analysts believe that the weak economy will give the Federal Reserve added incentive to cut interest rates.

“The market definitely anticipates easing by the Federal Reserve, and probably sooner rather than later,” said Alan McClymonds, co-manager of government trading at First Boston Corp. in New York.

Rates could fall by about 0.25 percentage points as early as next month, McClymonds added.

Most important of the economic reports out Friday were Labor Department statistics on the national jobless rate, which fell slightly to 5.3% in May from 5.4% in April.

“I think people got into a lather--an absolute frenzy--about inflation, despite the fact that they knew it was oil that was pushing the inflation numbers up,” Canelo said. “Inflation is under control. And the economy is not in risk of falling into a recession--it’s growing at a moderate pace.”

Nevertheless, there seemed to be some resistance to surpassing the 2,900 level, traders said. Although the Dow briefly blipped above that level during the day, it fell back and languished in the high 2,800s until the last few minutes of trading, when it slowly inched past the benchmark.

Boeing, which this week won a $4-billion order for commercial aircraft from China, was among the market leaders. Its stock jumped 2 to close at 84 5/8. General Motors shares closed at 49 5/8, up 1. Philip Morris rose 1 1/8, closing in NYSE trading at 43 1/4. And Merck rose 1 1/4, closing at 84.

Bank stocks were also strong because of the promise of lower interest rates. Citicorp shares closed at 23, up 1 1/8; First Interstate Bancorp rose 1 to end at 40 1/4, and Wells Fargo & Co. jumped 1 1/2 to finish at 80 7/8.

But one big negative was L.A. Gear, which fell 8 1/2 to close at 30 3/4 after reporting that its quarterly profit will be off. That in turn depressed stocks of other footwear makers, such as Reebok, which lost 3/4 to close at 18 1/8, and Nike, off 5/8 to finish at 77 7/8.

Broader market indicators were also strong. The Standard & Poor’s 500-stock index rose 1.93, closing at 363.16. The NYSE composite index of all listed common stocks rose 1.09 to finish at 198.03. The NASDAQ index of over-the-counter stocks rose 3.16 to close at 462.13. And the American Stock Exchange index climbed 0.77 to close at 363.83.

The Wilshire Associates equity index, which measures the value of New York, American and NASDAQ stocks, rose $19.49 billion to end at $3.47 trillion.

Gaining issues outpaced decliners on the NYSE by nearly 2 to 1, with 974 issues up and 570 issues down.

CREDIT Bonds Rally Sharply in Wake of Job News Bond prices soared as the market reacted to much weaker-than-expected job growth in May, which pointed to an economic slowdown.

Steven A. Wood, an economist with BankAmerica Capital Markets in San Francisco, said the unemployment report “suggests the economy is performing much more weakly than expected, and that will lead to lower inflation and an easing of monetary policy.”

Inflation erodes the value of fixed-income securities such as bonds. An easing of monetary policy by the Federal Reserve Board would lower interest rates, which would benefit bond prices.

“The Fed has been concerned, as have the markets, that the economy has been growing too rapidly to allow inflationary pressures to recede,” Wood said. “Now it appears the economy is not growing nearly as strongly.”

Wood said the market took off slowly after the report was issued, rising on light volume before heavy trading began in all maturities.

The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8.25%, unchanged from late Thursday.

CURRENCY Dollar Ends Week on a Mixed Note The dollar wound up the week mixed, gaining against the West German mark and Swiss franc and losing ground to the Japanese yen and British pound in domestic trading.

A widely awaited unemployment report initially had a negative impact on the dollar.

Such a report, which in this case drove down interest rates in the bond market, can have a negative effect on dollar-denominated holdings and can curb demand for dollars.

Sales of other currencies to collect profits amassed during recent advances helped the dollar recover from its lows of the day.

Lingering concerns about various international matters also buoyed the dollar. Confidence in the West German currency has been eroded by speculation that German unification could undermine the mark’s value.

COMMODITIES Gold Settles Lower; Livestock Prices Rise Precious metals futures plunged on the New York Commodity Exchange in the wake of weak employment figures and uncertainty about whether a trade agreement will result from U.S.-Soviet summit talks.

On other markets, grain and soybean futures fell, livestock and pork futures were higher, and energy futures were mixed.