Stocks Soar On Rate Slash

NEW YORK - Stocks barreled higher yesterday after the Federal Reserve cut its benchmark interest rate by a larger-than-expected half percentage point. The Dow Jones industrial average reacted by surging 335 points - its biggest one-day gain in nearly five years.

The Fed responded to the spread of credit-market problems into the rest of the economy by saying: "The tightening of credit conditions has the potential to intensify the housing [market] correction and to restrain economic growth more generally."

The central bank lowered the benchmark federal funds rate to 4.75 percent after keeping it unchanged for more than a year. The rate had not been lowered since 2003.

The Fed also reduced the discount rate - the percentage it charges banks borrowing from its discount window - by half a percentage point, to 5.25 percent. On Aug. 17, the central bank had lowered the discount rate by a half-point to help keep cash moving in the U.S. banking system.

The Dow soared 335.97, or 2.51 percent, to 13,739.39. The blue-chip index is now only about 1.9 percent below its record close of 14,000.41, reached July 19.

The Standard & Poor's 500 index rose 43.13, or 2.92 percent, to 1,519.78. The Nasdaq composite index gained 70.00, or 2.71 percent, to 2,651.66.

Small-company stocks, badly beaten during the market's summer turmoil, shot higher. The Russell 2000 index surged 30.82, or 3.97 percent, to 806.63.

Meanwhile, the dollar tumbled to an all-time low against the euro after the rate cut, because lower rates make a currency a less attractive investment. Crude-oil futures catapulted further into record terrain, rising 94 cents to $81.51 a barrel, and gold prices rallied to a multidecade high.

Those factors could add up to trouble for the consumer. Though the Fed tends to measure inflation after stripping out volatile food and energy prices, high commodity costs trickle down to consumers and can dampen their spending power.

"If they were concerned about inflation before, they should be more concerned now," said Alexander Paris, economist and market analyst for the Chicago-based Barrington Research Group Inc. He called the half-point rate slash "overkill."

However, the mood was cheery on Wall Street, especially since the central bank's decision capped an already strong day that saw economic and corporate data come in better than expected.

Lehman Bros. Holdings Inc., the nation's fourth-largest investment bank, posted a smaller-than-anticipated 3 percent decline in its third-quarter profit compared with a year earlier. Other investment banks are due to report later in the week on the most recent, tumultuous quarter.

Lehman rose $5.87, or 10 percent, to $64.49. The rest of the financial sector also soared.

Earlier yesterday, the Labor Department's report on the August Producer Price Index was more favorable than the market had expected. Wholesale prices fell 1.4 percent last month, the biggest decline in 10 months. Core inflation, which eliminates food and energy prices, rose a mild 0.2 percent, as expected.

In European trading, which ended before the Fed released its decision, Britain's FTSE 100 rose 1.63 percent, Germany's DAX index rose 1.27 percent and France's CAC-40 rose 2.02 percent.

In Asia, Japan's Nikkei index slid 2.02 percent and Hong Kong's Hang Seng Index fell 0.09 percent.