A Bull-ish Bounce

Alan Greenspan Federal Reserve AP

Stock markets posted stunning gains Wednesday after the Federal Reserve, worried about a possible recession, announced a surprise cut in a key interest rate.

The chain reaction led many analysts to predict that the bears had been banished from Wall Street, reports CBS News Business Correspondent Anthony Mason.

The Dow Jones soared 399.10 points to end the day at 10,615.83, a rise of 3.91 percent. The Nasdaq rose 156.22 to 2,079.44 — an 8.12 percent climb — while the Standard & Poor's 500 gained a solid 3.91 percent or 46.31 points to close at 1,238.12.

The Dow's gain was its third-largest ever in a single day, while the Nasdaq's 8.13 percent rise was its fourth-greatest one-day percentage gain.

"I am so happy with Chairman Greenspan I'd like to give him a hug," said Wells Fargo Bank chief economist Sung Sohn.

"We're paying for college today," cheered one investor.

The central bank said its decision to slash the federal funds rate by a half-point — the fourth such cut so far this year — was based on worries about an economic slowdown.

The Statement
Read why the Fed decided to cut rates.
The action brings the overnight bank lending rate, which banks charge each other, down to 4.5 percent. The more symbolic discount rate on Fed loans to banks will fall to 4.0 percent.

The Fed's cut was quickly followed by an announcement from Bank of America that it was cutting its prime lending rate by one-half point, to 7.50 percent. Other commercial banks were expected to follow suit.

The decision by the Fed's chief policy-making group, the Federal Open Market Committee, came during an emergency conference call.

The Fed cited a number of reasons for its action, including sluggish business investment, eroding consumer confidence, economic turmoil overseas and a slide in the stock market.

Taken together, this climate "threatens to keep the pace of economic activity unacceptably weak," the Fed said in a statement.

Despite the gloomy outlook, stock markets took off once the news of the Fed's action broke.

"The [Fed's] timing was perfect. Everyone had given up hope so the Fed maximzed the surprise and got [the most] bang for its buck," said Drew Matus, financial economist at Lehman Bros.

Adding to the glee over the rate cut were several good earnings reports to counter a profit warning from tech leader Hewlett-Packard.

AOL Time Warner topped estimates by 3 cents a share, Merrill Lynch by 2 cents and J.P. Morgan Chase by 4 cents. Coke and Pfizer were 2 cents over predictions, while International Paper matched expectations.

General Motors, the world biggest automaker, saw its earnings fall 87 percent in the first quarter. But the company said Wednesday it is restoring production on 30,000 vehicles, forecast a recovery for the economy in the second half of 2001 and posted earnings-per-share nearly double expectations.

Immediately after Wednesday's close, IBM announced that its earnings had met analysts expectations by rising 18 percent, and Apple boasted earnings of 11 cents per share when only a penny was predicted.

Even where there was bad news, it had a silver lining. On Tuesday, Intel said its income sank by almost $2 billion dollars, but the world's biggest chip maker forecast the worst was over.

Cautiously, analysts said the bears might finally be in retreat.

"I cannot envision a rip-roaring bull market kicking in. But I can simply make the case that we have seen the bottom," said Larry Wachtel of Prudential Securities. "The worst has been seen in this bear market."

In an interview with CBS News Anchor Dan Rather, former Fed governor and George Washington School of Business dean Susan Phillips said, "If we're not at the bottom I think we're close to the bottom."


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  • But the Fed warned there was still reason to worry. Consumers may not have cut back spending much, but companies have reduced investment as first quarter profits plummeted.

    "Capital investment has continued to soften and the persistent erosion in current and expected profitability in combination with rising uncertainty about the business outlook seems poised to dampen capital spending going forward," the Fed said in its statement.

    The economy grew at an annual rate of just 1 percent in the final three months of 2000, the weakest performance in more than five years.

    Many economists believe the economy continued to lose altitude in the recently-ended first quarter. Some analysts project that economic growth stalled during the January-March quarter and others sy it may actually have slipped into reverse.

    The last time the Fed changed rates between scheduled meetings of its policymaking Federal Open Market Committee was on January 3, one of three half-point cuts this year. The others were at scheduled meetings on January 31 and March 20.

    The Fed's next scheduled meeting is May 15, where it could cut rates again.

    "I think unless we start to see more of a turnaround we're likely to see continued rate cuts," said Phillips.


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