US stocks surge to five year high after Fed rate cut

March 19th, 2008 - 11:25 am ICT by admin  

By Arun Kumar
Washington, March 19 (IANS) As the US central bank hoping to avert a recession, cut short-term interests by an additional three-quarters of a point, to 2.25 percent, American stocks rocketed to their biggest gains in almost five and a half years. With the move Tuesday, the Federal Reserve as the central bank is called, has lowered interest rates by a full three points since September, bringing it to the lowest point since late 2004.

Economists had been expecting a cut of one-half to one point, because the nation’s economy has sagged so badly in response to the housing sector’s meltdown, and the growing fallout being felt in other sectors.

Additional confidence boosters came Tuesday, when two investment banking giants, Goldman Sachs and Lehman Bros., posted better-than-expected earnings, easing fears that another big Wall Street firm would suffer a run on the bank and fail like Bear Stearns did.

A day after a feared market meltdown, the upbeat news fuelled a relief rally, the Dow Jones industrial average jumped 420.41 points, or 3.51 percent, to 12,392.66. It was the Dow’s fourth-biggest point gain ever.

The Standard & Poor’s 500 index enjoyed its biggest percentage gain since October 2002, soaring 54.14 points, or 4.24 percent, to 1330.74. The Nasdaq composite rallied 91.25 points, or 4.19 percent, to 2268.26. The rally helped the Dow and S&P 500 trim their losses from the October highs to 12.5 percent and 14.9 percent.

In an accompanying statement, the Fed noted the weakness throughout the economy and the disarray in the nation’s financial markets in making it clear that the bigger threat to the economy is from weakness, rather than inflationary pressures.

Nonetheless, two Fed members voted against the rate cut, favouring what the statement referred to as “less aggressive action.”

The Fed said recent information “indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labour markets have softened,” while “financial markets remain under considerable stress.”

The tightening of credit and deepening of the housing contraction, the statement said, “are likely to weigh on economic growth over the next few quarters.”

“Inflation has been elevated, and some indicators of inflation expectations have risen. The committee expects inflation to moderate in coming quarters, reflecting a projected levelling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased.”

Tuesday’s rate cut, the Fed said, combined with the central bank’s recent moves to foster market liquidity, “should help promote moderate growth over time and mitigate the risks to economic activity.”

But more downside risk to the economy remains, the Fed committee said, adding that the Fed “will act in a timely manner as needed to promote sustainable economic growth and price stability.”

“The Fed is rapidly using up all its bullets,” Joel Naroff, head of the economic consulting firm that bears his name, was quoted as saying by the Chicago Tribune in a reference to the Fed’s latest rate cuts, “but there is no other choice.”

A small number of additional cuts may be needed, Naroff said, “but I believe the Fed will succeed in keeping us out of a steep and protracted recession.” The staggering economy, he predicted, “will be up and running by the end of the year.”

USA Today said “the doom-and-gloom that has permeated Wall Street all year seems to have been broken - at least for now.” The turning point appears to have occurred Sunday when the nation’s central bank took extraordinary steps to halt the run on investment banks and signed off on JPMorgan’s purchase of battered investment bank Bear Stearns.

Stocks have been hurt by a financial crisis caused by the housing bust. “What is most impressive is, despite some of the worst news since the 1930s, the market was able to remain above its January lows,” it cited Bruce Bittles, investment strategist at RW Baird as saying.

Bittles said the ability of the market to not drop below January’s floor, coupled with the massive pessimism that had been present in the market, suggests “strongly that the downside momentum has been broken.”

Still, while Wall Street’s advance was heartening, investors were well aware that over the past six months, stocks have had many bursts higher, only to give them back at the first sign of credit market or economic trouble.

It will take some time before anyone knows whether the market is back on a true upward track, or is just staging another bear market rally, USA today said noting that the economy is continuing to slide while costs are rising.

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