Buyers swarmed in stock and bond markets Tuesday after the Federal Reserve Board took a tough stand against inflation by raising short-term interest rates again.
But the dollar failed to get a lift from the Fed's move, suggesting that foreign investors remain wary of U.S. securities.
In the stock market, the Dow Jones industrials, which had been up 12 points just before the Fed's afternoon announcement, rocketed to close up 49.11 points at 3,720.61 in active trading.
In the bond market, yields tumbled nearly across the board. The 30-year Treasury bond yield plunged from Monday's 7.44% to 7.26%. The yield on three-year T-notes sank to 6.26% from 6.40%. Just one week ago, the Treasury was forced to pay 6.54% on new three-year notes.
Traders said investors were reacting both to the size of the Fed's rate hike--half a point in the discount rate, from 3% to 3.5%, and half a point in the federal funds rate, from 3.75% to 4.25%--and to the central bank's suggestion that this will be the last increase in short-term rates for a while.
"For the time being, the message of the stock and bond markets is that the Fed has hit the bull's-eye," said Hugh Johnson, market strategist at First Albany Corp. "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."
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.
Analysts said they were impressed with the magnitude of the rally in stocks and bonds, but many also cautioned that both markets remain vulnerable. Investors who failed to sell out as stock and bond prices dove in recent months may take the opportunity to trim their portfolios as prices rebound, some experts say. That could restrain any rallies.
Nonetheless, the strength in some interest-rate-sensitive stock groups Tuesday indicated that Wall Street believes rates have peaked for now, analysts said.
That message was also apparent in bonds' rally, experts said: Yields on long-term mortgage and muni bonds plummeted with T-bond yields, as investors rushed to lock in current high returns.
But in currency markets, the dollar lost ground despite the Fed's move. Ordinarily, higher short-term rates should bolster the dollar by attracting more foreign investment to short-term U.S. securities.
In New York, the dollar eased to 1.673 German marks from 1.674 on Monday. It also slipped to 104.45 Japanese yen from 104.75.
Many foreign investors believe U.S. rates remain less attractive than those offered by Germany or Japan after adjusting for inflation, some currency traders said.
In the stock market, meanwhile, buyers focused on banking, utility and insurance stocks, all of which should perform better if market interest rates stop rising.
Among the market highlights:
* Winners topped losers by 13 to 8 on the NYSE on active volume of 312 million shares. But broad market indexes were weaker than the blue chip Dow.
The Nasdaq composite index of mostly smaller stocks fell 0.39 point to 711.52, though it had been down more than 6 points at midday. Losers edged winners 14 to 12 on Nasdaq.
* In the Dow, some industrial names rose on new hopes for stable economic growth. Alcoa gained 2 1/8 to 70 1/2, Bethlehem Steel added 1 1/4 to 18 1/8, IBM jumped 2 3/4 to 61 1/4 and GM was up 1 3/8 to 54 3/8.
* Bank stocks jumped, helped in part by bankers' decision Tuesday to hike the prime lending rate to 7.25% from 6.25%. That will help offset banks' higher cost of funds because of the Fed rate hike.
Among major banks, Citicorp soared 1 3/4 to 38 7/8, First Interstate surged 1 5/8 to 82 3/8, BankAmerica gained 1 7/8 to 48 3/8, Wells Fargo jumped 2 1/8 to 146 7/8 and NationsBank gained 1 1/8 to 54 1/2.
* In the utility group, Detroit Edison added 5/8 to 25, Pacific Gas & Electric gained 3/4 to 24 1/4, Bell Atlantic leaped 1 5/8 to 52 7/8 and U.S. West jumped 1 1/4 to 40 1/4.
* On the downside, many tech stocks weakened again. Lotus Development plunged 3 7/8 to 52 on rumors about swelling software inventories, and computer chip maker Xilinx sank 7 to 39 1/2 on fears about slowing growth.
Overseas, markets were mixed ahead of the Fed's meeting. London's FTSE-100 index added 7.9 points to 3,123.5, while Frankfurt's DAX index eased 11.40 points to 2,259.71.
In Tokyo, the Nikkei index fell 54.91 points to 20,133.53.
But Toronto and Mexico City stocks rallied with U.S. shares after the Fed made its move. Toronto's TSE-300 index jumped 60.87 points to 4,269.15, while Mexico City's Bolsa index gained 48.75 points to 2,288.59.
Early today in Hong Kong the Hang Seng index jumped 328.29 points to 9,372.99, buoyed by Wall Street's gains.
In commodity markets, oil, gold and coffee prices fell, and commodities in general rested after Monday's surge.