NEW YORK (CNNfn) - A surprise interest rate cut by the Federal Reserve sent U.S. stocks soaring Wednesday on hopes that lower borrowing costs can save the economy from a profit-sapping slowdown.|
The Nasdaq composite surged a record 14.17 percent on the central bank's move, which stunned Wall Street with its timing and size.
"The Fed made a dramatic move today and it was needed," Al Goldman, chief market strategist at A.G. Edwards, told CNNfn's market coverage. "The Fed is now our friend." (329K WAV) (329K AIFF).
Euphoria replaced pessimism as stocks -- lower before the central bank's 1:25 p.m., ET, announcement -- climbed sharply as the news sunk in.
Trading volume surged. Both the New York Stock Exchange and Nasdaq Stock Market saw their busiest sessions ever.
The rate cut, which comes almost four weeks ahead of the central bank's next scheduled meeting, soothed a market worried for months over how much a slowing economy will erode corporate earnings.
After being down by as much as 40 points, the Nasdaq composite index finished the day up 324.82 points, or 14.17 percent, to 2,616.68. That topped the previous record, a 10.48 percent gain on Dec. 5, 2000.
The Dow Jones industrial average rallied 299.60 points, or 2.8 percent, to 10,945.75, climbing out of a 65-point hole. And the S&P 500 advanced 64.29 points, or 5 percent, to 1,347.56.
With the economy cooling, some analysts had expected the Fed to lower borrowing costs before its late January meeting. But no such rumors surfaced Wednesday.
In its decision, the Fed cut its target for overnight lending between banks by a half-percentage point to 6 percent. It also lowered the rate it charges member banks by a quarter-percentage point to 5.75 percent. The move marks the first easing by the Fed since November 1998. The bank's last inter-meeting move came in October of that year.
"If they move between meetings it's usually a move to shore up confidence," Diane Swonk, chief economist at Bank One, told CNNfn's market coverage.
Confidence could use a lift.
The Nasdaq, which fell a record 39.3 percent in 2000, slid again Tuesday for its lowest close in almost two years.
In its statement, the Fed expressed concern the economy is cooling too quickly.
"These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence," the Fed said.
More stocks rose than fell in heavy trading volume. Advancing issues on the New York Stock Exchange topped decliners 2,286 to 797 on record trading volume of 1.8 billion shares. Nasdaq winners topped losers 3,056 to 986. More than 3.1 billion shares traded, also a record.
In other markets, Treasury securities fell. The dollar surged against the euro and fell versus the yen.
Tech sector, banks rise
Financial stocks, ever sensitive to higher rates, surged. J.P. Morgan Chase (JPM: Research, Estimates) rose $6.63 to $50.63, while American Express (AXP: Research, Estimates) jumped $3.94 to $55.94.
Technology stocks also rose. Cisco Systems (CSCO: Research, Estimates) gained $8 to $41.94 and Sun Microsystems (SUNW: Research, Estimates) rallied $7.56 to $33.
Still, the day's gains come amid a tough time in the markets.
Companies in recent weeks such as Gillette, Xerox and SBC Communications have said their quarterly financial results will fall below forecasts as demand for their products and services slows.
Another handful of firms including Office Depot warned Wednesday about disappointing earnings ahead. And Lehman Brothers, citing weak demand for personal computers, cut 2001 earnings estimates for Intel and Dell Computer.
In their outlooks, economists have increasingly used the word "recession," defined as two quarters of negative economic growth. Just Tuesday, a key gauge of the nation's manufacturing activity fell to its lowest level since 1991.
Consumer confidence and spending have slowed as the Federal Reserve raised interest rates six times between the summer of 1999 and May, 2000.
The latest rate cut takes back May's half-percentage point hike. The move, economist say, shows the central bank's eagerness to keep a record expansion on track.
"They simply don't want a recession," James Annable, chief economist at WingspanBank, told CNNfn's market coverage. "It's an insurance policy."
The decision only cemented the notion that Alan Greenspan, the Federal Reserve chairman, counts among the world's most powerful figures. With a record number of Americans owning stocks, no person's words and actions are more closely followed by investors.
"They wanted a big splash today," Annable said of the Fed. "And they got it."
A conference of business leaders meeting in Texas with President-elect George W. Bush felt the splash.
"I think the move by Mr. Greenspan was welcomed by everyone here," Jack Welch, the CEO of General Electric (GE: Research, Estimates), told a gathering of press members during a break in the conference.
General Electric, the world's biggest company in terms of market value, just got bigger. Its stock gained $4.06 to $47.81 Wednesday.
Fed not finished?
While the stock market reacted swiftly Wednesday, Fed rate cuts typically take several months to take effect. And no one knows exactly how much the day's move by the bank will translate into the revival in corporate profits investors hope for.
And many who believe the Fed raised rates too much last year see more credit easings ahead.
"I look for them to cut rates at least once or twice more this year," William Sullivan, economist at Morgan Stanley Dean Witter, told CNN's Street Sweep.
But for a day anyway, investors found themselves caught up in a rare bout of optimism amid months of stocks declines.
"This proved the spark to push the market higher," Ken Tower, technical analyst at UST Securities, told Street Sweep. "It was great news."