Dow jumps 300 ahead of expected rate cut
NEW YORK – Wall Street barreled higher Tuesday as investors found relief in better-than-expected results from Lehman Brothers and Goldman Sachs, and anticipated a massive interest rate cut from the Federal Reserve.The Dow Jones industrial average surged 300 points.Investors, while they’ve seen a number of huge advances amid the market’s recent volatility, appeared considerably more upbeat than in the past few days. They’re confident that when the Fed’s meeting lets out at 2:15 p.m. EDT, it will reduce the target federal funds rate by a full point, bringing the rate to 2 percent.
The central bank has shown it is trying everything in its power to revive the stagnant credit markets and rescue the financial industry from collapse — it already relaxed its lending practices, and has backed JPMorgan Chase & Co.’s buyout of failing investment bank Bear Stearns Cos.
Quarterly results from two rivals of Bear Stearns — Lehman Brothers Inc. and Goldman Sachs Group Inc. — also gave some solace to a market fearful about investment banks weakening further from losing bets on mortgage-backed securities. Both Lehman and Goldman posted quarterly profits that were significantly lower than they were a year ago, but higher than analysts predicted.
There had been particular concern about Lehman. But Tuesday, Lehman shares spiked back up 33 percent, by $10.55 to $42.30. Goldman shares rose 12 percent, by $18.47 to $169.49, while Bear Stearns shares jumped 49 percent, by $2.38 to $7.19.
There’s no telling, however, how stocks will react to the Fed’s rate decision. Anything less than a full-point cut could trigger frenetic selling, while anything more could rekindle the feeling that the credit markets and economy are in worse shape than Wall Street thought.
And meanwhile, the Fed’s accompanying economic statement will be closely read for signs that the central bank is still willing to lower rates and come up with new ways to free up cash in the financial system. Many market participants are unsure if rate cuts will give the markets and the economy the stimulus they need; rate cuts also drive down the dollar, which in turn lifts commodity prices.
“They’re looking for any kind of comments about whether they’ll be stopping or slowing their easing,” said Alexander Paris, economist and market analyst for Chicago-based Barrington Research. “They’re looking at, where do you go from here? More and more people are concerned about inflation.”
In early afternoon trading Tuesday, the Dow rose 300.57, or 2.51 percent, to 12,272.82.
Broader stock indicators also surged. The Standard & Poor’s 500 index rose 38.26, or 3.00 percent, to 1,314.86, and the Nasdaq composite index rose 61.06, or 2.80 percent, to 2,238.07.
Isnt this just inflating the currency even more?