Investors Bet on Fed Rate Cut, Push Stocks Up

Wall Street appeared to give the Federal Reserve the benefit of the doubt Monday, pushing stocks broadly higher in advance of the central bank’s meeting today.

But analysts warned that the market’s mood probably will sour again if the Fed doesn’t announce an aggressive interest rate cut.

On Monday, the Dow Jones industrial average rose 135.70 points, or 1.4%, to 9,959.11, recouping less than one-fifth of last week’s 821-point plunge.

The Nasdaq composite index gained 60.27 points, or 3.2%, to 1,951.18, after diving 162 points, or nearly 8%, last week.

Though buyers returned Monday, trading volume was well below last week’s peak levels, suggesting that most investors were staying on the sidelines.

Fed policymakers, meeting today in Washington, are expected to announce their decision on interest rates around 11:15 a.m. PST. Wall Street remained split Monday on whether the Fed will cut its key short-term interest rate a half-point--the expectation before last week--or by a more dramatic 0.75 point.

Given the deep sell-off in stock markets worldwide last week amid growing concern about the health of the global economy, many analysts believe that the Fed needs to make a 0.75-point cut--reducing the so-called federal funds rate to 4.75%--to show that it won’t allow a financial crisis to develop and snowball.

“The perception is that the sky is falling because of the stock market,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “The stock market is the canary in the coal mine. . . . . If the canary dies, we will have a serious and deep recession.”

The Dow index last week suffered its biggest percentage decline in 11 years, and the broader Standard & Poor’s 500 index fell to a two-year low.

But many experts say the Fed would be overreacting to make a 0.75-point cut in the federal funds rate, the overnight loan rate among banks. That would be the biggest reduction in either of the Fed’s two key rates since December 1991, when the central bank cut the largely symbolic discount rate by a full point as it tried to spur growth after the 1990-91 recession.

Diane Swonk, chief economist at Bank One in Chicago, said she was looking for a half-point cut by the Fed today. She said the “real” economy is already showing signs of rebound even as Wall Street continues to suffer fallout from the bursting of a speculative bubble in tech stocks.

“If the Fed did cut rates by three-fourths of a point, it would look like they are pandering to Wall Street, and that is not a message they want to send,” she said.

The Fed already has cut its target for the federal funds rate by a full percentage point to 5.5% in half-point moves Jan. 3 and Jan. 31.

The January rate cuts were taken against the backdrop of an economy that appeared to have hit a brick wall at the end of last year, when unusually cold weather and rising energy bills sent consumer spending into a tailspin.

However, in the first two months of this year, consumer spending has rebounded, easing economists’ fears of a recession.

On Wall Street, some investors hunting for bargains among tech stocks Monday seemed to believe that the shares already reflect the worst possible outlook for the economy and interest rates. Investors bid up such battered names as Lucent Technologies, which jumped $1.98 to $11.97, and Xerox, which rose 38 cents to $5.41.

But analysts warned that some of the buying may have been by short sellers who had borrowed and sold tech shares in recent weeks, betting on further price declines. Some of those short sellers may have been closing out their positions Monday by repurchasing shares, fearing a deep Fed rate cut could spark a strong rally this week.

Other tech stock winners Monday included IBM, up $2.50 to $92.60; Hewlett-Packard, up $2.48 to $30.50; Micron Technology, up $3.06 to $43.06; Oracle, up $1.38 to $15.44; and Emulex, up $3.38 to $27.75.

But Intel slid 81 cents to $27.06, and Amazon.com fell 50 cents to $10.50.

Financial stocks rose after Lehman Bros. upgraded its rating on Goldman Sachs, Merrill Lynch and Morgan Stanley just days before the brokerages report earnings for the three months ended in February. Goldman shares gained $3.39 to $90.94, Merrill rose $3.70 to $58.50, and Morgan added $2.81 to $60.73.

Other sectors rallying Monday included drugs, chemicals, defense, biotechnology and banks.

In the broad market, winners topped losers by 20 to 11 on the New York Stock Exchange and by 22 to 15 on Nasdaq.

Wall Street ignored another sell-off in key Asian and European markets Monday. The German market fell 1.4%, and the Singapore market tumbled 2.8%.

While U.S. stocks rose, the bond market suffered profit-taking after safety-focused investors last week poured into Treasury bonds, sending yields to two-year lows. The yield on the two-year T-note rose to 4.31% on Monday from 4.25% on Friday.

No matter what the Fed does today, some analysts warned that other lingering concerns would make a sustained comeback for stocks unlikely over the next several weeks.

A major concern is corporate profits: Warnings about weak first-quarter earnings continue to hit Wall Street from companies in a wide swath of industries, analysts note. Earnings-reporting season begins in about three weeks.