The Chairman of the US Federal Reserve, Mr Alan Greenspan, gave a jolt to the US economy yesterday, cutting interest rates at a time when no one expected it and sending stocks soaring on US exchanges in extremely heavy dealing.
Technology stocks, beaten down as the New Economy stumbled, came roaring back, boosting the Nasdaq Composite Index by 10 per cent, the third-highest percentage gain in its history. The Dow Jones Index recovered almost all its losses since early March, when it dipped to 9,106, recording its second-biggest points gain ever.
Towards the close, the markets paused for breath, with the Dow closing up 397.48 points (3.89 per cent) at 10,614.21 and the Nasdaq at 2,079.63, up 156.41 points (8.13 per cent).
The US central bank announced its move as the market was making a steady recovery in early-morning trading after the giant computer chip-maker Intel beat its earnings forecast - a sign that the worst may soon be over for the battered information technology sector.
Following a breakfast-time conference call with Federal Bank presidents around the US, Mr Greenspan announced that he was cutting the key federal funds rate charged on overnight loans between banks by half a percentage point to 4.5 per cent. The timing was important. By moving while stocks were recovering, it did not look like a panic measure to save the market.
The Fed cited softening investment, erosion of current and future profits, and rising uncertainty in business outlook.
This is the fourth half-point cut this year and the second between scheduled meetings. The prospect that a further cut could come at the next scheduled meeting on May 15th - hinted at by the Fed's comment that the economy remained tilted towards weakness - added to market exuberance.
The Nasdaq surge yesterday was helped by upbeat earnings news from AOL Time Warner, the world's largest Internet and media company, which reported higher first-quarter earnings than expected.
However, the world's second-biggest manufacturer of computers, Hewlett-Packard, fore cast second-quarter profits far below Wall Street estimates and said that it would cut up to 3,000 of its 88,500 jobs.
The sudden rate cut led to speculation that Mr Greenspan might be anticipating a further setback to the US economy. "I'd say they are concerned about the darkening prospects for corporate balance sheets or corporate debt," said Mr Richard Babson, president of Babson-United Investment Advisers.
Computer giants IBM and Apple last night returned results ahead of expectations and cautiously upbeat assessments on future prospects.