Fed Cut in Rates Triggers Strong Rally in Bonds : Markets: But the move to stimulate a lagging economy drives the dollar lower and fails to boost stocks. The Dow closes off 10.27.

The Federal Reserve’s move Friday to lower interest rates in a bid to spur the stagnant economy triggered a strong bond market rally but also drove the dollar lower while failing to give a boost to the stock market.

With the economic recovery stalled just two months before the presidential elections, the Fed set aside worries about the sinking dollar and intervened to shove down the key federal funds rate by a quarter point, to 3%. The fed funds rate is what banks charge each other for overnight loans.

Treasury bond yields tumbled across the board as the Fed eased, with the yield on 30-year T-bonds sliding to 7.28%--the lowest since January, 1987--down from 7.36% Thursday. The bond’s price soared 29/32 point, or about $9.06 per $1,000 face amount.

But lower interest rates sent the weak dollar even lower against most major currencies. After bouncing back from record lows this week, the dollar in New York fell Friday to 1.402 German marks from 1.414 late Thursday. The dollar also dropped to 123.15 Japanese yen, down from 123.80 late Thursday.

In the stock market, the Fed’s move failed to offset negative reaction Friday to the government dismal employment report. The Dow Jones industrial average lost 10.27 points to close at 3,281.93.

The cut in the federal funds rate was seen by economists as the boldest move the Fed could have taken without seriously destabilizing the dollar and world currency markets. The Fed also wanted to avoid accusations of political motivation in trying to jump-start the economy just before the presidential election.

“The Fed might have eased (interest rates) more but for the appearance of looking political,” said Edward F. McKelvey, senior economist at the brokerage Goldman, Sachs & Co.

If the weak dollar wasn’t a consideration, the Fed almost certainly would have cut the discount rate again, now at 3%, economists said. The discount rate--what the Fed charges on loans to banks--acts as a floor under the federal funds rate.

Robert F. Wescott, senior economist with the WEFA Group in Pennsylvania, described the employment figures as “definitely a very depressing report.” Given the magnitude of the August job losses, it was no surprise that the Fed opted to lower interest rates rather than try to hold the line on the dollar, he said.

And even though the Fed is supposed to be independent of political influence, “there’s no question that the Administration and the Republican chairman of the Federal Reserve (Alan Greenspan) are very worried about the economy two months before the election,” Wescott said.

It was unclear, however, what the Fed will do if the dollar resumed a significant slide. The falling dollar poses risks for the world economy and also threatens to reignite inflation at home because a sliding dollar boosts prices of imported goods.

The Fed’s move to ease rates came after the Labor Department said non-farm payroll jobs fell by 83,000 in August. The drop came in stark contrast to most economists’ predictions that the number would rise by between 150,000 and 180,000. Economists described the drop as “extremely serious” and “depressing,” and said it was more significant than the fall in the unemployment rate to 7.6%.

Following the Fed’s intervention, rates on 3-month Treasury bills led longer-term yields lower. The 3-month T-bill discount rate plunged to 2.92% from 3.12% Thursday.

The sharper decline in shorter-term securities widened the yield gap between the two-year Treasury note and 30-year Treasury bond to 3.41 percentage points. That’s just shy of the all-time widest gap of 3.44 points set on July 17.

But signs that the economy was still sputtering hurt stocks. Despite the Dow index’s loss for the day, however, it finished theweek with a net gain of 14.32 points.

In the broader market, declining issues held a slight edge on advances on the New York Stock Exchange on Friday, with 818 up, 853 down and 635 unchanged. Big Board volume came to a light 124.38 million shares, down from 212.5 million on Thursday.

Among the market highlights:

* Actively traded blue chips included Merck, up 5/8 to 48 7/8; General Motors, up 3/8 to 35 1/8; Philip Morris, down 1/4 to 84 3/4, and International Business Machines, down 5/8 to 86.

* Glaxo Holdings climbed 1/2 to 29 3/4. A Food and Drug Administration advisory panel recommended approval of the company’s drug Zofran for use against post-operative nausea.

* Teva Pharmaceutical dropped 1 3/4 to 26 3/8 after Merck announced it is marketing a generic version of its Dolobid drug. Teva makes a similar generic product.

* Sears, Roebuck fell 1 1/8 to 41 3/8. Analysts trimmed earnings estimates after the company said it expects the after-tax impact of Hurricane Andrew on its Allstate insurance unit to be about $700 million.

* Intergraph lost 1 1/4 to 14 1/2. Traders said SoundView Financial cut its rating to a long-term hold from a buy and lowered earnings estimates.

* Digital Communications Associates, which warned late Thursday that its earnings for the current quarter would fall short of analysts’ estimates, tumbled 3 1/2 to 15 3/4.

* Bank stocks managed only a mixed showing on the drop in interest rates. J.P. Morgan rose 5/8 to 60 1/4, and Chemical Banking added 1/2 to 33 1/4, but BankAmerica lost 1/8 to 43 7/8, and Citicorp dropped 1/8 to 16 3/8.

* Federal National Mortgage rose 1 to 66 1/2, and Federal Home Loan Mortgage was up 1/8 at 42 7/8.

* Amerada Hess, subject of a rating downgrade by a brokerage firm, dropped 1 to 47 3/4.

* TRW rose 1 5/8 to 53 1/2. Kemper Securities upgraded its view to a long-term buy from a hold.

* Digital Communications dropped 3 1/2 to 15 3/4. The company said it expects first-quarter earnings per share to be either flat to 5% to 10% higher.

In overseas trading, Tokyo stocks pushed their rally into a second day to end at their highest levels since late May. The 225-share Nikkei average was up 168.81 points, or 0.92%, to 18,555.30.

London’s Financial Times 100-share average closed 19.7 points lower at 2,362.2, but it was 49.6 points up on last Friday, due mainly to massive government borrowing announced on Thursday to stabilize the pound.

In Frankfurt, the 30-share DAX average finished 5.75 points higher at 1,536.50, 20.03 points up on the week.

Commodities

Soybeans and corn futures prices posted moderate gains in a light, pre-holiday session on the Chicago Board of Trade as traders rolled the dice on forecasts of frost and a devastated Canadian canola crop.

Wheat futures slipped on position-squaring in advance of the long Labor Day weekend. On other commodity markets, energy futures rose; precious metals were mixed, and meat and livestock futures were mostly higher.

Wheat for September delivery settled 2 cents lower at $3.30 a bushel; September corn rose 0.50 cent to $2.255 a bushel; September oats were 1 cent higher at $1.385 a bushel; September soybeans rose 4 cents to $5.598 a bushel.

Elsewhere, oil prices closed higher on the New York Mercantile Exchange in a thinly traded session with light, sweet crude oil for October delivery settling 10 cents higher at $21.77 a barrel. October gold rose 50 cents on New York’s Commodity Exchange to $342.20 an ounce. September silver deliveries slipped 2 cents to $3.723 an ounce.

* MAIN STORY, A1