Stocks climb after Fed cuts discount rate
NEW YORK -- Stocks barreled higher Friday after the Federal Reserve did what Wall Street was clamoring for and cut its key discount rate a half percentage point. The move quelled investors' credit worries at least for the time being and sent the Dow Jones industrials up about 230 points.
The Fed -- which had resisted lowering rates despite weeks of market volatility, and instead added nearly $120 billion in liquidity into the banking system -- cut its discount rate to 5.75 percent from 6.25 percent. The central bank acknowledged the stock market turbulence that has pulled the Dow down by hundreds of points a day was posing a risk to economic growth.
"People were kind of baiting the Fed into doing something, and finally they did," said Philip Dow, managing director of equity trading at RBC Dain Rauscher. "The playground monitor finally showed up, and it showed someone cares and someone is bringing rationality into the market."
But the central bank made no mention of lowering its target for the federal funds rate, which has stood at 5.25 percent for more than a year. The fed funds rate determines the rates that banks charge each other, while the discount rate only covers loans the Fed makes to banks. Many strategists believe the market won't settle down until the Fed lowers the fed funds rate target, considered a more significant benchmark.
If the market doesn't get that rate cut, Friday's gains may not stick, especially since it's likely there will be plenty more news in the coming days and weeks of further troubles in the lending industry. Any mention of problems at subprime lenders or funds that invested in mortgages has sent stocks skidding over the past few weeks, and so have worries that tighter credit will stanch the flood of takeovers, which sent Wall Street to new highs earlier this year.
"Today's move, while helpful psychologically, didn't really alter the stresses on the system," said Hugh Whelan, managing director at Hartford Investment Management Co. "If you're a leveraged financial institution, a leveraged individual, a leveraged hedge fund, on Monday when you walk in, you're still facing the same stresses you faced today and yesterday."
Still, the Fed made it clear this wasn't the only step it would take if the volatility continued. In its statement, the Fed said it "is prepared to act as needed."
The Dow surged 233.30, or 1.82 percent, to 13,079.08.
The blue chip index stayed in positive territory the whole day, though trading was still volatile. The Dow rose more than 320 points in early trading, gave up more than half those gains, and then gained steam once more.
A series of triple-digit losses over the past couple of weeks has gnawed a 6 percent dent in the Dow since it closed at a record 14,000.41 on July 19. The index, despite Friday's robust gains, finished down than 1 percent for the week; the result of the heavy selling that preceded the Fed's move.
The Standard & Poor's 500 index rose 34.67, or 2.46 percent, to 1,445.94, and the Nasdaq composite index rose 53.96, or 2.20 percent, to 2,505.03.
Bonds slipped as stocks rose, with the yield on the benchmark 10-year Treasury note rising to 4.68 percent from 4.66 percent late Thursday.
Gains were seen in all sectors of the stock market, but financial stocks, which have been battered by the growing problems in mortgage lending, saw particularly heavy buying. Dow component JPMorgan Chase & Co. rose 3.4 percent, while Merrill Lynch and Lehman Brothers rose more than 6 percent.
The pummeled stocks of mortgage lenders also saw significant increases.