Stocks jump after Fed discount rate cut

Stocks jump after discount rate cut

Stocks soared Friday when the Federal Reserve did what Wall Street was clamoring for and cut its key discount rate a half percentage point.

The Dow Jones industrials, after six straight days of losses, rose more than 100 points.

The stock market's steep drop has been fueled by turmoil in the credit markets. The Fed poured $87.5 billion in liquidity into the banking system last week and $32 billion this week, but the rate cut was its most dramatic effort yet to alleviate fears about tightening credit and calm the global financial markets.

The Fed cut the discount rate to 5.75 percent from 6.25 percent, declaring that "downside risks" to the economy have increased appreciably.

"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."

The central bank did not change its target for the federal funds rate, however, which has remained at 5.25 percent for more than a year. Many strategists believe the market won't settle down until the Fed lowers the rate, which is the interest banks charge each other on overnight loans. The discount rate only covers loans the Fed makes to banks.

It was too early to tell how much of the buying was a relief rally after weeks of losses, and if the gains would stick. The market has quickly given back any advances it has scored in recent weeks amid growing signs of problems in the credit markets.

For investors, the question is whether the discount rate cut is a signal that the Fed is seriously leaning toward lowering the fed funds rate, considered a more important benchmark, or whether the central bank is trying to offer Wall Street a compromise.

"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 is that the Fed "is prepared to act as needed."

"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 growing problems in mortgage lending, saw the most buying, as they did on Thursday. The pummeled stocks of mortgage lenders also saw significant increases...

	Stocks End Mostly Higher on Lack of News	Associated Press	Mon Aug 20	1
	How the Fed Impacts the Markets	profecy	Sun Aug 19	0
	Dow Up 233 on Fed Rate News	profecy	Sun Aug 19	0
	Gold futures rise sharply as Fed cuts rate - MarketWatch	MarketWatch.com	Fri Aug 17	0
	Bernanke's `Rookie Mistake' Forces Fed to Shift Focus to Market	Bloomberg.com	Mon Aug 20	0