Wall Street, which began the day still quivering from Monday’s 101-point decline in stock prices, collected itself Tuesday and rebounded vigorously on news that the Federal Reserve Board had decided to lower a key short-term interest rate.
The Dow Jones industrial average, down about 20 points before the central bank’s action, finished with a gain of 34.68 points at 5109.89, regaining a third of the ground it lost in Monday’s selloff. Volume was heavy, totaling 478.30 million shares.
For much of the day traders fretted while a swirling snowstorm buffeted New York, and Federal Reserve policymakers confronted a blizzard of confusing economic and political questions, including the pros and cons of bestowing a holiday interest-rate cut.
Finally, in a brief statement, Fed Chairman Alan Greenspan broke the suspense, saying the Fed decided to lower the so-called federal-funds rate because inflationary pressures were easing. The cut, the second this year, lowered the federal-funds rate that commercial banks charge each other for overnight loans. It left the discount rate, which it charges banks for direct loans, at 5.25 percent.
“Inflation has been somewhat more favorable than anticipated, and this result, along with an associated moderation in inflation expectations, warrants a modest easing in monetary conditions,” Greenspan said.
Just the words Wall Street wanted to hear–especially a day after weathering the largest point drop in stock prices in four years.
“The economy’s slowing is a clear suggestion it needed a helping hand,” said economist Robert Dederick, a consultant to Northern Trust Co. “The only question was when it would come.”
It came just before 2 p.m., when the central bank’s policymaking Federal Open Market Committee announced it was lowering to 5.50 percent from 5.75 percent the key rate that influences borrowing costs for millions of Americans.
Wall Street reacted quickly and favorably to the announcement, and banks were expected to cut their prime lending rate, a benchmark for loans to consumers and businesses.
Banc One said after the markets closed that it would cut its prime lending rate to 8.5 percent from 8.75 percent, effective Wednesday.
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Banks, which profit from falling rates, were among the stocks to gain most from the Fed’s action. Chemical Bank, for example, gained $1.25, to $58.50.
By the end of the day the New York Stock Exchange’s composite index rose 2.05 points, to 325.71, while the Standard & Poor’s 500-stock index gained 5.12, to 611.93. Declining issues outnumbered advancers by about 5 to 3 on the NYSE.
A major bounceback in technology shares caused the Nasdaq composite index to jump 23.85 points, to 1026.41, its biggest one-day point gain in more than eight years–since it rebounded from the October 1987 stock market crash with a gain of 24.07.
Among computer-technology stocks, chipmaker Intel climbed $3.12, to $60.37. Among computer-makers, Dell Computer jumped $6.12, to $35.60; Compaq gained $3.50, to $49.12; and IBM rose $2.87, to $91.87. Among software companies, Microsoft added $3.87, to $90.87, and Adobe Systems jumped $6.50, to $63.75.
Technology stocks, which sizzled earlier this year, sold off sharply. As has been the case in previous technology-stock declines, some bargain hunters re-entered the market Tuesday, causing the closely watched sector to turn upward.
In the financial sector, Bank of America rose $1.60, to $64.60. Even Fleet Financial Group, which announced its second multibillion-dollar buyout in less than a month, rose $2.12, to $41.12.
Despite the market’s strong turnaround, many traders remained skittish because of the budget impasse between President Clinton and Congress. Tuesday was the fourth day of the latest partial government shutdown, and many analysts said dealing with the budget remains the most volatile issue influencing the market.
“It would help the market even more if they would get this budget thing together,” said Marshall Acuff, portfolio strategist at Smith Barney.
Indeed, chief executives of some of the biggest companies took out a two-page ad in leading newspapers Tuesday urging both sides in the budget battle to compromise.
“Without a balanced budget, the party’s over. No matter which party you’re in,” the ad said.
Analysts said the markets had been counting on a Christmas present in the form of a balanced-budget deal.
“They have received just the opposite,” said economist David Jones of Aubrey G. Lanston & Co., a Wall Street government-securities dealer.
Added William Dodge, chief investment strategist for Dean Witter, Discover & Co. in New York: “The budget deliberations caused the Fed to throttle back a bit, but did not derail its recognition that the economy needs lower interest rates.”
Wall Street wanted a rate cut following signs of a weakening economy, including uncertain holiday retail demand, a slowing market for cars and high consumer debt.
Typically, lower interest rates would hurt the dollar, but that was not the case Tuesday because the Fed chose to lower the short-term rate by a quarter point rather than a half and left alone the more influential discount rate.
As a result, the dollar bumped higher against major currencies. The dollar rose to 1.4410 German marks and 101.96 Japanese yen from 1.4290 marks and 101.52 yen late Monday.