Fed Hike Sends Dow Up 49.11; Yields Plunge

The Federal Reserve Board’s long-awaited hike in interest rates sent stock prices soaring and bond yields plummeting Tuesday.

The financial markets had been anticipating the move by the Fed, which has been trying to hold down inflation by increasing interest rates to cool economic growth.

The Dow Jones industrial average, which was up about 12 points in midafternoon before the central bank announced its decision, surged 49.11 to close at 3,720.61.

In the bond market, the Treasury’s key 30-year bond yield plunged to 7.26% from Monday’s 7.44%. Its price, which moves in the opposite direction, rocketed up 1 31/32 points, or $19.69 per $1,000 in face value.

Short-term Treasury securities rose 3/16 point to 3/8 point, and intermediate maturities rose 23/32 point to 1 11/32 points, the Telerate Inc. financial information service reported.

Blue chip stocks soared, while a range of other issues posted solid gains in brisk trading following word that the Fed was increasing the discount rate for the first time in more than five years.

The central bank announced it was increasing its discount rate, the interest it charges for direct loans to banks, to 3.5% from 3%. The increase is the first in this key rate in five years.

The central bank also moved to boost the federal funds rate by half a point, sending the target for overnight loans between commercial banks to 4.25% from 3.75%. Its three previous increases had been a quarter of a point at a time.

In addition, the Fed said the economy is now close to the neutral point that central bankers had been seeking--the point at which interest rates are neither spurring economic growth nor retarding it.

This was the fourth rate rise this year. Previously, the markets had reacted negatively to the news because of uncertainty about when the increases would end. This time the increases were expected, and investors felt more confident about Fed policy in that they believe the board has finished raising rates for the time being.

Investors also welcomed the Fed’s statement that the rate increases “substantially remove the degree of accommodation” that prevailed through 1993. The announcement suggests the Fed may now pause from raising rates for now as the economy’s prospects unfold in the months ahead.

Judging by the reaction of the financial markets, the rate hikes will help rather than hinder the economy and corporations, at least in the near future, said Hugh Johnson, market strategist at First Albany Corp.

“For the time being, the message of the stock and bond markets is that the Fed has hit the bull’s-eye,” he said. “The Fed administered medicine strong enough to kill off worries about inflation but not harsh enough to hamper growth in the economy and corporate earnings.”

Wall Street’s broad-market indicators heavily weighted with New York Stock Exchange-listed issues also advanced strongly. The NYSE composite index added 2.35 to finish at 248.13, while Standard & Poor’s 500 stock index rose 4.88 to 449.37.

Gainers outpaced losers by about 8 to 5 on the NYSE, and trading activity picked up on the Big Board’s floor. Volume came to 311.68 million shares, up from Monday’s subdued level of 234.70 million.

On the downside, many computer and related stocks remained depressed and prevented the Nasdaq composite index from gaining ground. It ended off 0.39 at 711.52.

* The market’s rate-related euphoria benefited banking stocks, with BankAmerica buoyed 1 7/8 to 48 3/8 and Citicorp boosted 1 3/4 to 38 7/8 in heavy NYSE trading.

* IBM broke through technical resistance at the 60 level, jumping 2 7/8 to 61 3/8.

* Hewlett-Packard fell 1 5/8 to 76 5/8 despite higher earnings for the fiscal second quarter.

On the Nasdaq, where many technology stocks are listed, the lineup of active issues was studded with losers. Conspicuous among them was Lotus Development, which tumbled 4 1/8 to 51 3/4, and Xilinx, which lost 7 to 39 1/2. Reports of lower growth in the computer field weighed down the sector.

* Wal-Mart Stores gained 7/8 to 23 5/8 after the retailer announced higher first-quarter profit.

* Home Depot, which also posted higher first-quarter earnings, rose 1 7/8 to 42 5/8.

In stock trading overseas, markets were mixed and were held in check while awaiting word on U.S. interest rate policy. In Europe, London’s Financial Times 100-share average ended 7.9 points higher at 3,123.5, while Germany’s DAX 30-share average ended at 2,259.71, down 11.40 points. In Tokyo, the 225-share Nikkei average ended the session down 54.91 points at 20,133.53.

Mexico City’s Bolsa index tracked the Dow Jones gain to finish up 48.75 points at 2,288.59.

Elsewhere, the dollar ended lower against most major currencies, though it recovered from its worst point of the day following the Fed’s move.

Gold prices fell, closing down $1.60 at 381.40 on the New York Comex. Silver also declined.