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Dow surges on rate cut

Televisions inside the New York Stock Exchange herald the Federal Reserve’s move Tuesday to cut a key interest rate by three-quarters of a percentage point, to 2.25 percent.

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Televisions inside the New York Stock Exchange herald the Federal Reserve’s move Tuesday to cut a key interest rate by three-quarters of a percentage point, to 2.25 percent.

NEW YORK — Wall Street stormed higher Tuesday as investors, following stronger-than-expected earnings from two big investment banks, were also galvanized by the Federal Reserve's decision to cut interest rates by three-quarters of a percentage point. The Dow Jones industrial average soared 420 points, its biggest one-day point gain in more than five years.

The central bank's benchmark federal funds rate is now at 2.25 percent — its lowest level since December 2004, and less than half what it was last summer. The Fed began lowering rates exactly six months ago, after the credit markets seized up due to soaring defaults in subprime mortgages.

In its statement accompanying the rate decision, the Fed said, "recent information indicates that the outlook for economic activity has weakened further," but also that "uncertainty about the inflation outlook has increased."

"The Fed once again in the statement showed that it is ready for further action if this were needed," said Christian Menegatti, lead analyst for online economic research firm RGE Monitor.

But continuing economic problems mean the jubilation could be short-lived.

"If banks aren't willing to make the loans, it doesn't matter how low interest rates go," University of Central Florida economist Sean Snaith said.

He said he's hopeful the national economy will start turning around by the third quarter, but says the Florida economy is likely to take longer, weighed down by problems in the housing market.

"The future looks very bleak to me," said Karin Stephansky, 45, a part-time proof reader whose husband is a carpenter. She said they considered refinancing their Indian Rocks Beach home recently and were disappointed to discover mortgage rates hadn't fallen much. On the other hand, the yield on their online savings account has dropped to 3 percent from 5.5 percent in the past year. "What's the point in saving with no interest?" she asked.

Quarterly results from Lehman Brothers Inc. and Goldman Sachs Group Inc. early Tuesday gave great comfort to a market fearful about investment banks weakening further — and hurting the rest of the economy — due to losing bets on mortgage-backed securities.

The Dow closed up 420.41, or 3.51 percent, at 12,392.66. The Dow's point gain was the largest point jump for the index since a 447-point advance in July 2002.

Times personal finance editor Helen Huntley contributed to this report.

More bad signs

A pair of economic reports released Tuesday lend further evidence of a troubled economy:

Wholesale prices rose again in February as another hefty increase in energy costs offset falling food prices. Outside of food and energy, prices shot up at the fastest pace in 15 months. The Labor Department reported Tuesday that wholesale prices were up 0.3 percent last month. Outside of food and energy, the rise in inflation was a troubling 0.5 percent, the biggest increase for core inflation since a rise of 0.9 percent in November 2006.

U.S. housing starts dropped in February and building permits fell to the lowest level in more than 16 years, signaling slowing construction will continue to hurt economic growth. Builders broke ground on 1.065-million homes at an annual rate, down 0.6 percent from a revised 1.071-million pace in January.

Times wires

Cause and effect

The Fed's decision to cut interest rates sent the Dow soaring

to its biggest one-day point gain in more than five years.

Dow surges on rate cut 03/18/08 [Last modified: Thursday, October 28, 2010 9:43am]

    

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