Fed’s half-point rate cut
lights fire under Wall Street

Cisco helps stabilize techs after
beating analysts' forecasts

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By Lisa Singhania
Associated Press

NEWYORK >> The 10th interest-rate cut of the year sparked a solid rally on Wall Street today, as investors decided to bet that the Federal Reserve's latest effort to stimulate growth would work.

The advance primarily came in the last hour of trading, however, reflecting the market's lingering worries about the economy.

The Dow Jones industrial average closed up 150.09, or 1.6 percent, at 9,591.12, extending a two-day advance. The Dow had been down about 50 points just before the Federal Reserve's announcement at 9:15 p.m. HST.

Broader stock indicators also advanced, recovering from a lackluster performance before the Fed news.

The Standard & Poor's 500 index rose 16.02, or 1.5 percent, to 1,118.86, and the Nasdaq composite index soared 41.43 to 1,835.08, a gain of 2.3 percent.

Advancing issues narrowly led decliners 3 to 2 on the New York Stock Exchange. Volume picked up late in the session, coming to 1.33 billion shares, slightly higher than 1.19 billion yesterday. The NYSE composite index rose 6.50 to 570.29, the American Stock Exchange composite index fell 2.90 to 817.43 and the Russell 2000 index gained 5.24 to 442.78.

The Treasury's 2-year note rose 632 to 100 2532; its yield fell 10 basis points to 2.34 percent. The 10-year note gained 632 to 105 2532; its yield fell 2 basis points to 4.27 percent. The 30-year bond was unchanged at 108 232; its yield stayed at 4.86 percent.

The Fed's half-point rate reduction had been widely anticipated because of recent data suggesting the economy is in a recession, as well as worries that the Sept. 11 terrorist attacks will make it even more difficult for business to turn around.

"The Fed has shown a very strong commitment to take interest rates to wherever they have to go in order to get this economy going again," said Jim Weiss, chief investment officer for equities at State Street Research.

Wall Street's initial response to the cut, though, was lukewarm and it took about an hour for the market to advance decisively.

Investors appeared to be weighing the potentially positive effects that lower interest rates would have on business against the Fed's acknowledgment that "for the foreseeable future ... the risks are weighted toward conditions that may generate economic weakness."

The decision by Fed Chairman Alan Greenspan and his colleagues to cut the interest banks charge each other on overnight loans brought the rate to 2 percent, the lowest since September 1961.

In response, commercial banks reduced their prime lending rates, the benchmark for millions of consumer and business loans, by a similar half-point to 5 percent, the lowest level since June 25, 1972.

First Hawaiian Bank followed the Fed rate cut by lowering its prime lending rate to 5 percent from 5.5 percent effective tomorrow. The prime rate is used to set interest rates on many types of loans.

Other local banks were expected to announce similar rate reductions.

"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity," the Fed said in a statement. In the part of the statement that reflects possible future action, policy-makers held the door open to further rates cuts. The Fed also cut its discount rate, the interest that the Fed charges to make direct loans to banks, by a half-point to 1.50 percent.

Meanwhile, the Dow got an additional boost today from news that key Hewlett-Packard stockholders planned to vote against the proposed $20 billion takeover of Compaq Computer.

Dow component HP rose $2.92 to $19.81, a 17 percent jump, while Compaq fell 49 cents, or 5.5 percent, to $8.50.

Investors also welcomed better-than-expected earnings and revenues from Cisco Systems, which reported first-quarter results late yesterday.

The company, however, offered few details about future quarters other than to say its fiscal second-quarter revenue would be flat to slightly higher. Still, the stock rose 57 cents to $18.47 on buyers eager for any indication that business is stabilizing and a recovery will occur.

Among blue chips, J.P. Morgan Chase rose $1.18 to $37.54, a 3.8 percent gain, reflecting the boost financial stocks usually get from rate cuts. General Electric advanced $1.03 to $39.80.

The rally extended a runup that had begun on Friday in anticipation of the Fed's move. Although the market has regained nearly all of its post-terror attack losses, it has yet to move much higher. Instead, rallies have been met with selling as investors, fearful the good times won't last, lock in their profits.

Additionally, skepticism about the ability of lower rates to stimulate the economy might have tempered Wall Street's enthusiasm.

A mostly dismal third-quarter earnings season with few indications of better times ahead also has investors nervous about making big commitments to the market. Unemployment also is on the rise, as companies cut back in the soft economy.

"I think the equity market is less confident that interest rate cuts will do the trick," said David Lindsay, fixed-income portfolio manager for Fleet Assets Management.

"That's because the earnings improvement from a rate cut appears to have an even longer lag time than any economic improvement."

The economy -- which had been growing weakly for more than a year -- shrank at a 0.4 percent annual rate, as measured by the gross domestic product, in the July-September quarter, the government reported last week. Analysts predict the current quarter will show an even larger contraction. A common definition of recession is two consecutive quarters of declining GDP.

Fallout from the terrorist attacks was evident in a spate of other dismal economic reports released last week:

>> Consumer confidence plunged to a 7 12-year low in October.

>> The nation's unemployment soared from 4.9 percent to 5.4 percent in October and 415,000 jobs were eliminated during the month, the biggest one-month decline in 21 years.

>> Manufacturing activity in October plunged to its lowest level since February 1991, when the country was mired in its last recession.

>> Consumers cut back on spending in September by the largest amount in nearly 15 years.

Adding to the economic uncertainty is the threat of new terrorist attacks and increasing worries about anthrax contamination in the mail. Still, economists are hopeful the economy will rebound in the second half of next year.