Rate cut unleashes surge by the Dow

NEW YORK - Stocks barreled higher yesterday after the Federal Reserve did what Wall Street had been clamoring for: cut its key discount rate half a percentage point. The move quelled investors' credit worries, at least for the time being, and sent the Dow Jones industrial average up about 230 points.

The Fed had resisted lowering rates despite weeks of market volatility, and instead added nearly $120 billion in liquidity into the banking system. But yesterday, it cut its discount rate to 5.75 percent from 6.25 percent. The central bank acknowledged that the stock market turbulence 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 what banks charge each other for overnight loans, while the discount rate covers only the Fed's loans 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.

The Dow surged 233.30, or 1.82 percent, to 13,079.08. The blue-chip index stayed in positive territory the whole day, although 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.

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.

Traders who bet on how the Fed might alter rates expect the central bank to lower the benchmark fed funds rate at its meeting Sept. 18. Some investors are hoping for a cut even sooner.

Gains were seen yesterday in all sectors of the stock market, but there was particularly heavy buying of financial stocks, which have been battered by the growing problems in mortgage lending. Dow component JPMorgan Chase & Co. rose 3.4 percent, while Merrill Lynch & Co. Inc. and Lehman Brothers rose more than 6 percent.

The pummeled stocks of mortgage lenders also posted 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. 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 was up 1.49 percent, and France's CAC-40 gained 1.86 percent.

In Asian trading, which closed before the Fed lowered the discount rate, Japan's Nikkei stock average 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 more than 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.

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 situated.