Stocks Jump on Fed's Prediction for Inflation

Bank Expects Prices to Level Off, Holds Rate Steady

NEW YORK, Aug. 5 -- The Dow Jones industrial average jumped 2.9 percent Tuesday as investors drew confidence from a continued decline in oil prices and from the Federal Reserve's prediction that inflation would level off.

The Fed left interest rates unchanged and indicated that although it is worried about the slumping economy, it will be vigilant about inflation.

"Everyone is so focused on commodity prices, so the fact that oil prices have continued their multiple-day decline is taking a lot of fear out of the marketplace and giving stocks a good reason to bounce," said Wendell Perkins, chief investment officer of Optique Capital Management, which oversees $1.6 billion. Meanwhile, the central bank's concern about economic growth "is good news in that it suggests the Fed will have to take its time before it raises interest rates," he added.

The Dow posted its biggest gain in four months, climbing 331.62, to 11,615.77. The Standard & Poor's 500-stock index and the Nasdaq composite index also posted gains, with each rising more than 2.8 percent.

Ron Sloan, manager of the $5 billion Aim Charter Fund in San Francisco, said he still had concerns about inflation and suspected that Tuesday's rally would not mark a turning point in the long-term performance of stocks.

"You've had a couple of 200-plus point moves [upward] in the last months that led to nothing, and then you had a few 200-plus point declines that led to nothing," Sloan said. But "the prospect of a rate increase is perhaps a little bit farther back on the burner than some people thought," he said.

Tuesday's rally was broad-based, with gains posted by 29 of the 30 blue-chip stocks in the Dow and with all 10 industries represented in the S&P 500 ending the day higher. The Dow's only decliner, oil-producer Chevron, fell 31 cents, to $82.49.

Procter & Gamble shares rose $2.15, to $67.97, as the company beat quarterly profit estimates. Price increases on many of the household products sold by the company helped offset higher manufacturing and packaging costs stemming from the rise in oil.

Lehman Brothers shares jumped $2.30, to $20.24, after CNBC, citing unnamed sources, reported that the embattled investment bank might try to sell its investment-management division.

Shares of J.P. Morgan Chase, Citigroup and Merrill Lynch also rose as stockholders, whipsawed earlier this year by the still-rippling credit crunch, took solace in the signals coming from the Fed.

The central bank's policymaking committee left the federal funds rate, at which banks lend to one another, at 2 percent. The rate ultimately affects what consumers pay on credit cards, car loans and adjustable-rate mortgages, and what businesses pay to borrow money to expand.

"Until the liquidity crunch is under control, the Fed really can't raise interest rates," said David Dreman, chairman of Dreman Value Management, which oversees $15 billion in Jersey City, N.J. "And so we have to block out the concerns about inflation and focus entirely on the liquidity crisis, temporarily."