Stocks surge on rate cut

NEW YORK (CNNMoney.com) -- Stocks rallied and bonds slumped Wednesday after the Federal Reserve cut a key short-term interest rate by a quarter point, as expected, and implied that it was done cutting rates for the time being.

The Dow Jones industrial average (Charts) added 137 points or 1 percent, according to early tallies, while the S&P 500 (Charts) index added 1.2 percent. The Nasdaq composite (Charts) added 1.5 percent and ended at a fresh 2007 high and its highest close in nearly seven years.

Stocks had been volatile in the first 30 minutes after the Fed announcement, but turned higher after that, extending the morning's gains.

Treasury prices slumped, boosting the corresponding yields. Oil prices closed at a record high. Gold prices surged.

Here's a look at what was moving near the close.

Central bank officials cut the fed funds rate by a quarter-percentage point to 4.50 percent at the conclusion of their two-day policy meeting.

The move was in line with forecasts and followed a half point cut in September, which was made to help loosen up the credit markets and protect the economy from the impact of the housing market collapse.

Although the quarter point cut wasn't much of a surprise, the statement was a little more hawkish than what most people expected, said Stephen Stanley, chief economist at RBS Greenwich Capital.

"I think they signaled more than once in the statement that they pretty much are done for now," he said. "It doesn't mean that they won't cut again if they have to, but it seems like they are trying to prepare the market for the possibility that they are going to be on hold for a bit."

In the closely-watched statement, the bankers said that while conditions in financial markets have improved somewhat, "the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."

The bankers also acknowledged that while core inflation has remained moderate, the recent run up in oil and commodity prices, among other factors, could drive up inflationary pressures. Fed watchers who were calling for the central bank to hold steady this time had been concerned that lowering borrowing rates would increase pricing pressure even more and that part of the statement seemed to address those concerns.

The Fed decision was not unanimous. One of the bankers, Kansas City Fed President Thomas M. Hoenig dissented, preferring no change.

Treasury prices slumped on bets that the statement implies the Federal Reserve is not going to cut rates again anytime soon. The selloff boosted the yield on the benchmark 10-year note to 4.47 percent from 4.38 percent late Tuesday. Bond prices and yields move in opposite directions.

Stocks had risen through the early afternoon as investors geared up for the Fed news and eyed a strong reading on GDP growth and the day's other economic news. The positive tone seemed to overshadow any potential concerns about record oil prices and the plunging dollar.

U.S. light crude oil for December delivery briefly hit a record high of $94.69 a barrel on the New York Mercantile Exchange, before pulling back a bit. Oil prices had already risen after the government's weekly report showed a surprise drop in crude inventories, but the gains accelerated after the Fed announcement.

COMEX gold for December delivery rose $5.80 to $793.60 an ounce.

In currency trading, the dollar fell to another record low against the euro and inched higher versus the yen.

Market breadth was positive. On the New York Stock Exchange, winners beat losers nearly by almost three to one on volume of 1 billion shares. On the Nasdaq, advancers topped two to one on volume of 1.87 billion shares.

Gains were broad based, with 26 of 30 Dow stocks rising, led by Microsoft (Charts, Fortune 500), which hit a 52-week high. Intel (Charts, Fortune 500), Caterpillar (Charts, Fortune 500), American Express (Charts, Fortune 500) and JP Morgan (Charts, Fortune 500) were among the other big gainers.

Among other movers, Google (Charts, Fortune 500) topped $700 for the first time ever Wednesday. (Full story).

MasterCard (Charts) jumped 13 percent after reporting higher quarterly earnings that beat estimates.

Newmont Mining (Charts, Fortune 500) surged 8 percent after the gold miner reported higher quarterly sales and earnings that topped forecasts.

Clorox (Charts, Fortune 500) gained after reporting higher quarterly earnings that topped estimates.

Approximately 66 percent of the S&P 500 has reported September quarter results, with earnings on track to have fallen 1.3 percent from a year ago, according to the latest Thomson Financial estimates. That's a blended figure that combines reported and expected earnings and suggests the third-quarter will end up having seen the slowest growth in at least five years.

Ahead of the Fed meeting, investors waded through a busy morning for economic news.

The economy grew at a 3.9 percent annual rate in the third quarter, the government said, after having grown at a 3.8 percent annual rate last quarter. Economists surveyed by Briefing.com thought it would grow at a 3.1 percent annual rate.

The GDP price deflator, the report's inflation component, rose at a pace of 0.8 percent in the quarter, much slower than what economists were forecasting. The more closely-watched "core" PCE deflator rose at an annual rate of 1.8 percent, faster than the previous quarter but still within the Fed's presumed comfort zone.

Another government report, the employment cost index, rose a smaller-than-expected 0.8 percent in the third quarter.

The Chicago PMI, a regional read on manufacturing, fell to 49.7 in October, from 54.2 in September. Economists thought it would fall to 53.0.

September construction spending rose 0.3 percent after falling 0.2 percent in the previous month. Economists thought it would fall 0.4 percent.

And the ADP employment report showed private sector employment rose by 106,000 in October, topping forecasts for a rise of 56,000.