Stocks soared, with some market indexes smashing through to record highs, as the Federal Reserve raised interest rates but hinted that a single, modest increase might be all that's needed to quell inflation.
The Dow Jones industrial average rose 155.45 to close at 10,970.80, rounding out a session that saw the index drop as much as 83 points in morning trading, then pop over 11,000 for the first time since May 14.
Today's rally propelled broader market indicators to new closing highs. The Standard & Poor's 500-stock index rose 21.21, to 1372.66, beating its previous record of 1367.56, reached May 13. The Nasdaq composite index rose 44.01 to close at 2686.12, eclipsing the previous high of 2652.05, set April 26.
"The market got a major relief rally," said John Shaughnessy, chief investment strategist at Advest.
Bond prices, battered for weeks by the threat of inflation and higher interest rates, also recovered, sending yields on the 30-year Treasury bond falling to 5.96 percent from 6.06 percent late Tuesday. The price of the's benchmark bond rose $12.81 per $1,000 in face value.
The Fed's Open Market Committee surprised few with the announcement of a quarter-percentage-point increase in short-term interest rates. But the committee also returned to what's called a neutral bias on interest rates, which indicates Fed officials believe they may not need to follow up today's rate action with additional increases.
Traders welcomed the Fed's announcement, hoping for an end to the volatile price swings and sluggish trading that has characterized the market since mid-May, when the Fed first signaled its willingness to raise rates in an effort to hold inflation down.
Bank and brokerage stocks were among the first to benefit, as the Fed's future course appeared less punishing than previously feared. Shares of those companies are particularly vulnerable to higher interest rates, which cut into lending volume.
J.P. Morgan rose 4 3/4, to 140 1/2, the strongest gainer among Dow components. Morgan Stanley Dean Witter shot up 7 7/8, to 102 5/8, and Schwab gained 8 7/8 to close at 109.
Analysts were quick to caution that the Fed's neutral bias leaves it plenty of room to impose higher rates if it finds further indications that inflation has crept into the still-booming economy.
While the overall market continued its rally today, some stocks were left on the sidelines.
Shares of long-distance phone companies were mostly lower. MCI WorldCom faltered, slipping 7-9/16, to 86-1/16, amid reports of a Justice Department antitrust investigation of its undersea cable business. One Wall Street analyst also predicted an industry price war as the companies struggle for competitive position.
Disney was lower for much of the session after Merrill Lynch analyst Jessica Reif Cohen forecast lower earnings for fiscal years 1999 and 2000. The ebullience of the afternoon session lifted Disney shares, however, to close at 30-13/16, up 11/16.