Stocks Rally After Key Rate Slashed
Wednesday, December 17, 2008
Stocks surged yesterday after the Federal Reserve cut a key interest rate to a historic low as investors shrugged off dismal earnings from Goldman Sachs and signs that the country's recession is worsening.
The Dow Jones industrial average climbed 4.2 percent, or 359.61 points, to 8924.14. The Standard & Poor's 500-stock index was up 5.14 percent, or 44.61 points, to 913.18, while the tech-heavy Nasdaq composite index gained 5.41 percent, or 81.55 points, to 1589.89.
The depth of the Fed cut surpassed expectations. The Fed announced that it would lower a key target rate to a range of zero to 0.25 percent from 1 percent and indicated that it could expand programs to buy long-term U.S. Treasury bonds and other types of debt, including mortgage-backed securities.
The dollar fell sharply against the yen and the euro, but the announcement helped drive demand for Treasury bonds, already at historic highs. That could help drive down mortgage rates over the next several weeks, analysts said. The average interest rate for a 30-year, fixed-rate mortgage has fallen to 5.47 percent, according to a Freddie Mac survey. "We're within spitting distance of 5 percent with all the elements in play and achievable in the next few weeks," said Brian Bethune, chief U.S. financial economist for IHS Global Insight.
The announcement gave the financial sector a boost. J.P. Morgan Chase climbed 13 percent, to $32.35 a share, giving it the biggest gains on the Dow. Bank of America's stock spent most of the day in negative territory after Friedman Billings Ramsey gave the company an underperform rating but closed up 7 percent, at $15.10 a share.
There were indications, however, that the financial sector is still grappling with the impact of the economic crisis. Goldman Sachs reported a $2.1 billion loss in its fourth quarter yesterday, its first quarterly loss since becoming a public company in 1999. The loss was worse than analysts expected, but Goldman's stock, which has lost more than half its value this year, closed up 14 percent at $76.
Signs emerged yesterday that the country's economic woes are deepening. Consumer prices fell 1.7 percent in November on a seasonally adjusted basis, the fastest decline on record, according to the Labor Department. New home construction fell 18.9 percent last month, the Commerce Department reported. That was worse than analysts expected and the largest decline in 24 years.
Crude oil slipped 2 percent, to $43.60 a barrel, on the New York Mercantile Exchange, despite expectations that the Organization of the Petroleum Exporting Countries will announce a substantial cut in oil production this week.