NEW YORK (CNNmoney) - U.S. stocks rallied Tuesday, bringing the Dow Jones industrial average within 15 points of its pre-Sept. 11 level after the Federal Reserve cut interest rates to 40-year lows.
Stepping its fight against recession, central bankers lowered borrowing costs by a large, half-percentage point, the tenth cut in 11 months, and kept alive prospects for even lower lending rates ahead.
Stocks, down before the mid- afternoon announcement, moved higher as investors found another reason to bank on a profit recovery next year. The Nasdaq composite index rose to its highest level since late August, while the Dow industrials posted its best finish since terrorists attacked New York and Washington.
"They (the Fed) are making sure they keep the economic stimulus in place because there is a lot of uncertainty," Mike Ryan, senior fixed-income strategist at UBS PaineWebber, told CNNfn.
The decision followed uncertainty among economists, some of whom, like Ryan, forecast a quarter-percentage point cut. The more aggressive move signaled the Fed's concern about an economy that just ended its worst quarterly performance in a decade.
"I think the Fed felt this was not the time to be cautious and conservative," Wayne Ayers, economist at FleetBoston Financial, told CNNfn's Street Sweep.
The biggest percentage gains were on the Nasdaq, where Cisco Systems, the maker of networking gear, upped sales targets after posting a quarterly profit that topped forecasts. Dow member Hewlett-Packard rallied after family shareholders said they would vote against the company's planned merger with Compaq Computer.
The Dow industrials rose 150.09 points, or 1.6 percent, to 9,591.12, coming closer than ever to the 9,605.51 close on Sept. 10. The Nasdaq rose 41.43 points, or 2.3 percent, to 1,835.08, its best finish since Aug. 29.
The Standard & Poor's 500 rose 16.02, or 1.5 percent, to end the day at 1,118.86.
More stocks rose than fell. On the New York Stock Exchange, advancing stocks topped declining ones 2-to-1 as 1.3 billion shares had traded. Nasdaq winners edged losers by a 4-to-3 margin as 1.9 billion stocks changed hands.
In other markets, Treasury securities rose. The dollar fell against the yen and rose versus the euro.
Tenth time a charm?
The Fed's latest cut took the overnight intra-bank lending rate to 2 percent, its lowest level since 1961, from 2.5 percent.
With the move, the central bank has cut borrowing costs 4.5 percentage points this year, a period of rising unemployment and tumbling consumer confidence and corporate profits.
The U.S. economy last summer contracted for the first time since 1993, data showed last week. And October's unemployment rate rose to a five-year high.
"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity," the Fed's said in its statement, adding that the "risks are weighted mainly toward conditions that may generate economic weakness."
For Fed watchers, those words signaled more rate cuts ahead, possibly at its next meeting Dec. 11.
"There is nothing in the statement to suggest they're done," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Lower short-term rates are one of several moves to stimulate growth. Elsewhere, the government has lowered taxes and pledged billions of dollars in economic aid.
Stocks have responded. Since Sept. 21, the end of the first week of trading following the terrorist attacks, the Dow industrials are up 16.4 percent, while the Nasdaq has advanced 29 percent.
The cut appeared to satisfy investors, who have been buying stocks this autumn amid hopes that business and consumer spending will improve next year.
On the Nasdaq, Cisco Systems (CSCO: up $0.57 to $18.47, Research, Estimates) late Monday raised its sales targets for the current quarter and said fiscal first-quarter earnings fell to 2 cents per share. The numbers, which topped forecasts, lifted some hopes that the worst of the downturn in technology spending has past.
At least three brokerages, ABN AMRO, Lehman Brothers, and Credit Suisse First Boston, upgraded the networking equipment maker.
Hewlett-Packard (HWP: up $2.92 to $19.81, Research, Estimates) rallied. Some members of the Hewlett family, as well as the revocable trust and the foundation in the family's name, have agreed to vote against HP's $18.4 billion takeover of Compaq Computer (CPQ: down $0.49 to $8.50, Research, Estimates).
Microsoft (MSFT: up $1.51 to $64.78, Research, Estimates) also rose. The 18 states suing the software maker disagreed on whether to sign last week's deal between Microsoft and the Justice Department.
Philip Morris (MO: up $0.25 to $48.55, Research, Estimates) said it is comfortable with earlier forecasts of 9 percent earnings growth, according to Reuters.
Only four Dow stocks fell. Among them, Disney (DIS: down $0.41 to $18.75, Research, Estimates) declined more than 2 percent after Goldman Sachs downgraded the media company to "market perform" from "market outperform.".
MetLife (MET: up $0.10 to $28.00, Research, Estimates), the insurer, said its profit fell to $227 million, or 30 cents a share, topping lowered forecasts.
After the close of trading, wireless provider Qualcomm (QCOM: up $1.65 to $54.73, Research, Estimates) is expected to post flat earnings of 25 cents a share in the latest quarter.
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