Closing Market Report

Star-Bulletin news services

Wednesday, June 30, 1999

Dow soars after
quarter-point rate hike

Investor gamble that the
widely expected increase will
not be the first in a series

From staff and wire reports


NEW YORK -- Stocks soared today after the Federal Reserve followed through on a long-expected plan to raise interest rates by a quarter point. Investors were heartened by a suggestion from the Fed that a single, modest rate increase might be enough to quell inflation.

The Dow Jones industrial average rose 155.45 to close at 10,970.80. The index was down about 50 points before the Fed's mid-afternoon announcement.

Broader stock indicators also reversed course and ended the session with solid gains. "The market got a major relief rally," said John Shaughnessy, chief investment strategist at Advest Inc.

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 5.99 percent from 6.06 percent late yesterday.

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.

Bank and brokerage stocks shot higher 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.

The two top Hawaii banks normally follow mainland banks, which are expected to increase their key lending rates by a quarter point. But as of late this morning, Bank of Hawaii and First Hawaiian Bank had not made any rate announcement.

Paul Brewbaker, Bank of Hawaii's chief economist, said the move by the Federal Reserve is a positive one. "The (quarter-point) rate increase was widely expected. But the Fed has shown a move from a tightening bias to a neutral bias and that caught the market by surprise. The bias points to the future and the likelihood that there won't be future moves."

Brewbaker said many people expected the more rate hikes to a total of three-quarters of a point above current levels and they had factored in decisions with that presumption. Without that bias by the Fed, however, things look better for business, he said.

Hawaii, meanwhile, has shown "a bit of a recovery" and the stable interest rates will help the construction-loan side, and those who are planning to buy real estate, he said. "There's nothing in the Fed increase that will hurt us."

On Wall Street, traders also 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.

The S&P 500 rose 21.21 to 1,372.66, and the Nasdaq composite index gained 43.54 to a closing high of 2,685.65, eclipsing the previous high of 2,652.05 set April 26.

Advancers beat decliners by a 5-to-3 margin on the New York Stock Exchange, with 1,922 up, 1,145 down and 483 unchanged. NYSE volume totaled 1.12 billion shares vs. 816.26 million yesterday.

The NYSE composite index rose 10.14 to 648.13; the American Stock Exchange composite index gained 20.45 to 797.93; and the Russell 2000 index of smaller companies rose 3.60 to 457.68.

As the second quarter and first half drew to a close today, some money managers shifted their portfolios up to the last minute, hoping to settle positions left in limbo while investors awaited the Fed's announcement.

David G. Sowerby, a vice president at Loomis, Sayles & Co., shrugged off the pressure of the Fed's decision, adding that despite the slump in major market indexes, a wide range of stocks in the Standard & Poor's 500 rose over the course of the second quarter.

"There was a broader, deeper leadership," he said. "Many people will be pleasantly surprised when they look at their 401(k)s or mutual fund statements from this quarter."

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