NEW YORK — Wall Street bounded higher Wednesday after the Federal Reserve soothed some of investors’ fears about a sinking economy, stating that risks to the financial markets from the summer’s credit crises have eased. The Dow Jones industrial average gained more than 130 points on the day.
Stocks initially zigzagged after the Fed lowered interest rates as expected because some investors balked at the notion that the Fed might not lower rates again at its December meeting. However, investors eventually appeared relieved that the Fed’s comments about 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.
Wall Street was heartened by the fact that investors, businesses and consumers alike will be getting cheaper access to cash because of the widely anticipated quarter-point rate cut. 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 – the rate banks charge each other for overnight loans.
After months of agonizing over an anemic credit market, investors appeared to take some solace that the Fed found room to offer a less accommodative statement than some had expected.
“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 also 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.
Quincy Krosby, chief investment strategist at The Hartford, said the market decided that the central bank wasn’t necessarily ruling out further rate cuts.
“I think that the market finally realized after the initial drop-off that the Fed is saying ‘Look, we’re going to be data-dependent,”‘ she said.
That would be a return to the Fed’s mode of operation before the summer’s constriction in the credit markets forced the bank to set aside some of its concerns about inflation.
Krosby added that after giving investors the rate cut, prudence demanded that the Fed offer a somewhat cautious statement and address concerns about surging commodity prices. Oil hit another record Wednesday, while gold rose above $800 an ounce for the first time in 27 years.
