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Wall Street boosted by good news

Times Staff Writers

American consumers got a rare double dose of good news Tuesday, triggering a broad stock market rally that sent the Dow Jones industrial average up more than 330 points.

The Federal Reserve kept interest rates steady, which at the least should help the credit crunch from getting worse.

And crude oil prices dropped again, closing below $120 a barrel for the first time since early May. That should help consumers buy more than just gasoline, boosting retailers and the broader economy just as the government’s economic-stimulus package nears an end.

“Even if [oil prices] stay here, that’s likely a significant stimulus to the economy, particularly to consumers,” said Alexander Paris, president of Barrington Research Associates, a money management and economic forecasting firm in Chicago.

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Consumer stocks led the market rally. Shares of Macy’s Inc. jumped almost 9%, while Sears Holdings Corp. posted a gain of 10.6%. Whirlpool Corp. was up 7.4%.

The rally gained momentum after the Fed held its target federal funds rate at 2%, where it has rested since April 30, and raised expectations that the central bank might not boost rates until early next year.

In a statement accompanying its decision, the Fed struck a delicate balance between addressing the softening economy and promising vigilance on inflation.

“Labor markets have softened further and financial markets remain under considerable stress,” the statement said. “Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.”

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The Fed said it expected rising prices “to moderate later this year and next year, but the inflation outlook remains highly uncertain.”

The statement was similar in tone to the one after its last meeting in June, but seemed to play up the economic risks. The June statement said “downside risks” to the economy “appear to have diminished somewhat.” That sentiment was excluded this time.

Analysts took it as a sign that the Fed, while it doesn’t have much room to cut rates, doesn’t want to risk aggravating the economy and deepening the credit crunch by raising them to tamp down pricing pressures, analysts said.

“This is not an economy hungering for lower interest rates,” said Ken Mayland, president of Pepper Pike, Ohio-based ClearView Economics. “The Fed doesn’t need to lower interest rates. The Fed needs to act to restore confidence and liquidity in all the credit markets.”

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Oil continued its recent descent as weak economies in the U.S. and Europe, and signs of tapering growth in China, are expected to eat into demand.

Oil futures for September delivery in New York fell $2.24 to $119.17 a barrel, the lowest finish since May 5. The close is about $26, or 18%, below the record of $145.29 on July 3.

Retail gasoline prices, which have been falling steadily along with the price of oil, are likely to head lower still.

On Tuesday, the cost of self-serve regular in California averaged $4.197 a gallon, down less than 1 cent overnight. Nationwide, the average price of gas fell a penny overnight to $3.871 a gallon.

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“We’ve seen this continued deterioration of price in response to lower demand,” said Andrew Lipow, a Houston-based analyst and former trader, who projected that oil could drop to $110 a barrel.

“And in four weeks, it’s Labor Day, and the peak summer travel season is over,” Lipow said. “Plus, there’s been ample supply for our needs, and we continue to receive imports.”

Commodities prices also closed generally lower, with the Reuters/Jefferies CRB index falling 0.9%.

Stocks staged a broad-based rally, with the Dow climbing 331.62 points, or 2.9%, to 11,615.77. Financial stocks and those tied to consumer spending habits -- such as electronics stores, restaurants and apparel companies -- led the advance.

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Broader stock indicators also rose sharply. The Standard & Poor’s 500 added 35.87 points, or 2.9%, to 1,284.88, and the Nasdaq composite index increased 64.27 points, or 2.8%, to 2,349.83.

The debate now is whether oil prices can fall enough to prop up the economy, especially given that a further drop would be a double-edged sword signifying further economic weakness.

Some analysts doubt that crude oil would dip enough to sustain the economy through the rest of the year.

“It’s a good thing that oil prices are off, but they’re still too high,” Mayland said. “Oil at these levels means bad things for the economy.”

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Oil is still up 24% this year, and few people expect prices below $100 a barrel.

“I would be very surprised to see oil below $100 or $110, and we’re not seeing oil at $60 a barrel for sure,” said Adolfo Laurenti, economist at Mesirow Financial in Chicago.

But even though the unemployment rate rose to 5.7% last month, Laurenti said, job losses have been moderate compared with past economic downturns and consumers could keep spending as long as the job picture remains somewhat stable.

“People are still employed,” he said. “They’re still getting a salary. They still have disposable income.”

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In other market highlights:

Among retailers, Macy’s added $1.60 to $19.49 and Sears Holding jumped $8.78 to $91.56. Wal-Mart Stores added $1.91 to $60.34. Appliance maker Whirlpool was up $5.50 to $80.15.

Gold futures fell $21.50 an ounce to $878.60. The yield on the 10-year Treasury note rose to 4.02% from 3.96% on Monday.

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walter.hamilton@latimes.com

elizabeth.douglass@latimes.com

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Times staff writer Tom Petruno contributed to this report. Hamilton reported from New York and Douglass from San Diego County.

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