Stocks rebound on discount rate cut

Stocks rebound on discount rate cut

By MADLEN READ
AP Business Writer

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 that 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.Traders
who bet on how the Fed might alter rates expect the central bank will
lower the benchmark fed funds rate at its next meeting on Sept. 18.
Some investors are hoping for a cut in that benchmark rate even sooner."If
the cut in the discount rate succeeds in restoring confidence, then
perhaps there is no need for the Fed to cut rates at the Sept. 18
meeting," said John Lonski, chief economist of Moody's Investor
Service. He added, though, that the key line in the Fed's statement
Friday was its willingness to take more steps to prevent market
volatility from harming the economy."That means the Fed is prepared to make a rate cut if stability doesn't come," Lonski said.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. The most actively traded stock on the New York
Stock Exchange, and one of its biggest percentage gainers, was
Countrywide Financial Corp. The home mortgage lender rose $2.48, or
13.1 percent, to $21.43.Energy and industrial companies also
strengthened notably. The biggest gainers among the 30 Dow companies
were aluminum producer Alcoa Inc. and oil company Exxon Mobil Corp.,
which both jumped more than 4 percent.Major European indexes
recovered substantially after the Fed's announcement from steep
declines in earlier trading. Britain's FTSE 100 rose 3.50 percent,
Germany's DAX index rose 1.49 percent, and France's CAC-40 rose 1.86
percent.In Asian trading, which closed before the Fed lowered
the discount rate, Japan's Nikkei stock average had plunged 5.42
percent as the yen continued its climb against the dollar. The dollar
briefly dipped below 112 yen for the first time in over a year,
suggesting that some investors were taking their Japanese currency out
of higher-yielding dollar assets.The dollar was mixed against other major currencies. Gold prices jumped.Advancing
issues outnumbered decliners by about 7 to 1 on the New York Stock
Exchange. Consolidated volume came to 5.01 billion shares, down from a
record 6.13 billion Thursday.The Russell 2000 index of smaller companies added 17.20, or 2.24 percent, to 786.03.Crude
oil futures rose 98 cents to $71.98 a barrel. Traders have been
tracking the path of Hurricane Dean, which is threatening to head west
into the Gulf of Mexico, where many oil installations are located.--------The
Dow Jones industrial average ended the week down 160.46, or 1.21
percent, at 13,079.08. The Standard & Poor's 500 index finished
down 7.70, or 0.53 percent, at 1,445.94. The Nasdaq composite index
ended down 39.86, or 1.57, at 2,505.03.The Russell 2000 index finished the week down 2.75, or 0.35 percent, at 786.03.The
Dow Jones Wilshire 5000 Composite Index - a free-float weighted index
that measures 5,000 U.S. based companies - ended Friday at 14,531.52,
down 109.51 for the week. A year ago, the index was at 12,979.88.