Strong Finish for Markets After Fed's Rate Cut

Wall Street stormed higher today as investors, optimistic following stronger-than-expected earnings from two big investment banks, were also galvanized by the Federal Reserve's decision to cut interest rates by three-quarters of a percentage point. The Dow Jones industrial average soared 420 points, its biggest one-day point gain in more than five years.

Many investors were expecting the Fed to cut rates a full point, but appeared to overcome their early disappointment, especially since a 0.75 point cut is still substantial. The central bank's benchmark fed funds rate is now at 2.25% — its lowest level since December 2004, and less than half what it was last summer. The Fed began lowering rates exactly six months ago, after the credit markets seized up due to soaring defaults in subprime mortgages.

In its statement accompanying the rate decision, the Fed said "recent information indicates that the outlook for economic activity has weakened further," but also that "uncertainty about the inflation outlook has increased."

"The Fed once again in the statement showed that it is ready for further action if this were needed," a lead analyst for online economic research firm RGE Monitor, Christian Menegatti, said. "It also showed the fact that it's still paying attention to inflation ... but that it is far from being the primary concern right now. And the market knows that, and it is happy."

Quarterly results from Lehman Brothers Inc. and Goldman Sachs Group Inc. early today gave great comfort to a market fearful about investment banks weakening further — and hurting the rest of the economy — after losing bets on mortgage-backed securities. After Sunday's news that the stricken Bear Stearns Cos. was being bought by JPMorgan Chase & Co. at a bargain price of $2 a share, both Lehman and Goldman posted quarterly profits early today that were significantly lower than they were a year ago, but higher than analysts predicted.

"The overwhelming news this morning was the Lehman and Goldman Sachs earnings," the director of equity trading at Baird & Co, Jim Herrick, said. "The earnings this morning allayed investors' fears that there's going to be a hard collapse."

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.

After the Fed's decision was announced, the Dow first gave back half of its 300-point gain, then shot higher, closing up 420.41, or 3.51%, at 12,392.66. It was the biggest point gain for the Dow since a 447-point advance on July 29, 2002.

Broader stock indicators also finished sharply higher. The Standard & Poor's 500 index rose 54.14, or 4.24%, at 1,330.74, and the Nasdaq composite index rose 91.25, or 4.19, to 2,268.26.