STOCKS : Fed Provides the Motivation; Dow Soars 33.41
News that the Federal Reserve had cut the key discount rate to 6.5%, effective today, sent Wall Street stocks higher Tuesday.
“The market thought about it for about three seconds, then it went up, up and away,” said Alfred Goldman, director of technical research at A. G. Edwards & Sons.
After the Fed’s afternoon announcement, the 30-share Dow Jones industrial index gained more than 27 points in minutes. The index closed up 33.41, or 1.3%, at 2,626.73. It had been up as much as 39 points, however.
Volume on the New York Stock Exchange was a robust 176.5 million shares, compared to 118.6 million Monday. Gaining issues outnumbered losers 971 to 581.
The Fed’s rate cut had been long-anticipated by financial markets, which have sought relief for the sagging economy and weak banking sector.
The Fed said it will cut the discount rate--the rate on short-term loans to member banks--to 6.5% from 7%. It was the first time the Fed has changed the rate since Feb. 24, 1989.
Lower interest rates are considered a key tool in helping turn the faltering economy, by making credit easier and taking pressure off heavily indebted companies.
The Fed has been cautious about cutting interest rates for fear of putting too much money into the financial system, thereby stoking inflation. But Tuesday the Commerce Department reported that consumer prices rose a moderate 0.3% in November, leaving room for the central bank to act.
The big question now is whether the Fed’s actions are too late.
Some analysts say the economy’s slide into a steep recession now will have to run its course, even if the Fed pushes rates even lower. Indeed, the market’s relative caution suggested that many investors see the rate cut as too little.
Among the market highlights:
* Industrial and technology stocks led the market, on the expectation that a revived economy would help those firms’ fortunes first. The Dow was pulled higher by GM, up 1 1/4 to 35 1/8; GE, up 1 1/2 to 56 7/8, and 3M Co., up 1 3/8 to 85 1/2.
Among tech stocks, AST Research soared 5 1/2 to 32 after it said second-quarter profits would be sharply higher. ( Related stories, D3. ) AST also set a 2-for-1 stock split. Elsewhere, Intel rose 1 1/2 to 37 1/4, Apple jumped 2 1/8 to 42 1/4, Conner Peripherals rose 1 5/8 to 24 1/4 and Computer Sciences added 1 1/8 to 48.
* Citicorp slashed its dividend and said it would post a loss in the fourth quarter, but the stock gained 3/4 to 14 1/8 as investors expected worse. Other bank stocks rallied on news of the Fed rate cut. Manufacturers Hanover jumped 1 7/8 to 20 7/8, Security Pacific rose 1 3/8 to 22 and BankAmerica added 1 1/2 to 25. Bankers Trust rose 2 7/8 to 44 1/8 after raising its quarterly dividend to 63.5 cents a share from 58.25 cents.
* Retailers were strong on hopes for the economy. TJX jumped 1 to 10 5/8, Gap gained 1 3/8 to 33 1/2 and May Department Stores leaped 1 7/8 to 44 3/8. But Sherman Oaks-based House of Fabrics lost 1/8 to 30 1/2. It offered $13.50 in cash or stock for Portland, Ore.-based Fabricland, another fabric retailer. Fabricland rose 2 1/4 to 12 1/4.
In London, shares firmed slightly by the close following a stronger early trend on Wall Street.
The Financial Times-Stock Exchange index of 100 leading British shares closed 3.9 points higher at 2,161.8.
In Frankfurt, Germany, stocks ended little changed.
The 30-share DAX index rose 1.54 points to 1,477.41.
In Tokyo, stocks rose in thin trading despite concerns over the Persian Gulf crisis that helped to depress some other Asian share markets.
The key 225-share Nikkei average closed up 336.11 points at 24,424.02. But by midday today, the Nikkei was up 455.60 points to 24,879.62 on news of the Fed’s interest rate cut.
CREDIT Swiftness of Cut Boosts Bond Prices A cut in the discount rate propelled bond prices sharply higher as traders applauded the Fed’s action and anticipated that the central bank would take further steps to loosen credit.
The Treasury’s bellwether 30-year bond surged 1 1/4 points, or $12.50 per $1,000 in face amount. Its yield plunged to 8.07% from 8.18% late Monday.
The credit markets had expected the Fed to take some action to lower interest rates because of the weakening economy. But traders were surprised and impressed by the swiftness of the announcement, coming immediately after a Fed board meeting.
“The fact it came the day of the meeting . . . is indicative of the extent to which the Fed is concerned about the depths of the current recession,” said Ward McCarthy, analyst at Stone & McCarthy Research Associates.
The federal funds rate, the interest charged on overnight loans between banks, fell to 7.25% from 7.3125% late Monday.
CURRENCY Dollar Declines in Late Trading The dollar fell moderately against most foreign currencies as the Federal Reserve cut interest rates.
However, traders said the dollar’s decline was cushioned by the continued potential for a war in the Persian Gulf to disrupt foreign economies heavily dependent on imported oil.
The dollar closed at 1.478 German marks in New York, down from Monday’s 1.487. Against the Japanese yen, the dollar fell to 132.72 from 133.10.
It cost $1.9305 in New York to buy one British pound, unchanged from late Monday. In London, sterling rose to $1.9350 from $1.9290 late Monday.
COMMODITIES Freeze Fears Lift Orange Juice Futures Prices of orange juice futures jumped in panicked buying on the New York Cotton Exchange as forecasts for a frosty Christmas weekend in much of the country triggered memories of last year’s disastrous Florida freeze.
But analysts and meteorologists said fears of a similar killing frost in the next week were unfounded because freezing temperatures from the cold wave are unlikely to reach Florida and the orange harvest is running far ahead of 1989.
Frozen concentrated orange juice futures prices settled 4.9 to 5.75 cents higher, with the contract for delivery in January up 5.75 cents at $1.10 a pound, a four-week high.
Elsewhere, light sweet crude oil settled 40 to 81 cents higher, with January at $27.86 a barrel; gold ended 40 cents to $1 lower, with December at $376.50 an ounce; silver was 0.1 to 0.4 cent higher, with December at $3.96 an ounce.
Market Roundup, D6