Fed rate cut gives stocks a boost

NEW YORK – Wall Street bounded higher Wednesday after the Federal Reserve lowered interest rates as expected and said risks to the financial markets from the summer’s credit crisis have eased. The Dow Jones industrial average gained more than 130 points on the day.

Stocks zigzagged in the minutes after the Fed’s decision as some observers read comments from the central bank as indicating further rate reductions are less likely. However, investors appeared relieved that the Fed’s comments about the inflation – a perennial concern – signaled the central bank was able to return to somewhat more parochial worries and focus less about upheaval in the credit markets than when it met last month.

Investors, businesses and consumers alike will be getting cheaper access to cash because of the Fed’s quarter-point rate cut, and that likely gave stocks a boost. The federal funds rate now stands at 4.50 percent. Last month, the Fed surprised the market with a larger-than-expected half-point cut in the funds rate.

“A rather stingy Fed suggests that they see an economy that is in pretty good shape,” said Bruce McCain, head of the investment strategy team for Key Private Bank.

“They’re saying now we can turn back to the issue of inflation and implicit in that is that the economy is getting back on track,” he said.

The Dow, which had dipped briefly into negative territory after the decision, rose 137.54, or 1 percent, to 13,930.01.

Broader stock indicators advanced. The Standard & Poor’s 500 index rose 18.36, or 1.20 percent, to 1,549.38, and the Nasdaq composite index rose 42.41, or 1.51 percent, to 2,859.12.

In comments following its two-day meeting on interest rates, central bank policymakers said recent spikes in energy and commodity prices are among the forces that could be adding to inflation pressures and that “the upside risks to inflation roughly balance the downside risks to growth.”

The rate cut came after a 9-1 vote, with Kansas City Fed President Thomas Hoenig dissenting, arguing that he preferred no change in the funds rate.

The Fed appeared more upbeat about the health of the economy than it did last month when it said strains in the credit markets threatened to further pinch the housing market and the economy at large.

Overseas markets closed higher ahead of the Fed’s decision. Britain’s FTSE 100 rose 0.94 percent, Germany’s DAX index added 0.52, and France’s CAC-40 gained 0.76 percent. Japan’s Nikkei stock average rose 0.52 percent, while Hong Kong’s Hang Seng index fell 0.90 percent.