After fretting for days that the Federal Reserve would lower interest rates by only a quarter point, investors sent stocks soaring on Wall Street yesterday after Tuesday's announcement of the fifth 50basis-point cut in as many months. By early afternoon the Dow had broken the 11,000 barrier. It closed up 3.16 per cent at 11,216.18, its highest since September 12th last year.
The Nasdaq made even more spectacular gains, closing at 2,166.40 - up 80.82 points, or 3.88 per cent. The buying-in interest trickled down to almost all sectors and four Dow stocks even recorded new 52-week highs.
The party-on atmosphere on Wall Street was in sharp contrast to the flat reaction on Tuesday afternoon when the markets barely budged after Federal Reserve chairman Mr Alan Greenspan and his colleagues gave investors all they could have hoped for.
As so often, the change of mood was based as much on psychology as on economic indicators. Overnight the perception gained ground that the Fed had not fired its last shot in its aggressive campaign to rescue the economy from recession, and that it could ease rates further at its next meeting on June 27th. This was encouraged by a report that consumer inflation rose 0.3 per cent in April, less than analysts had predicted.
The one thing that would persuade the Fed policy-makers to halt their rate-cutting spree would be alarm over rising inflation, but yesterday's figures were relatively tame, especially given the spectacular rise in petrol prices in recent weeks.
Mass dumping of inventories has helped to keep the index in check and clothing prices took their biggest monthly plunge in 52 years, falling by 1.3 per cent in April. The modest advance in the Consumer Price Index, the government's most closely watched inflation gauge, followed a 0.1 per cent increase in March. Then came news of a stronger than expected performance in the housing sector which buoyed investors' spirits. With mortgage rates at 7 per cent for a 30-year loan, the lowest for two years, the US Commerce Department reported that housing construction rose by 1.5 per cent in April after a 2.3 per cent drop in March.
In addition, positive comments on the outlook for several companies helped boost sentiment, with Merck, Johnson & Johnson, Cisco and Microsoft making the running. Bullish comments from software maker BEA Systems, chip equipment maker Applied Materials and doughnut maker Krispy Kreme Doughnuts helped boost sentiment. On Tuesday, the Federal Reserve Open Market Committee voted to reduce its target for the benchmark funds rate to 4 per cent, the lowest since April 1994, citing a continuing decline in capital spending and weak corporate earnings.
