By Robert Holmes
A surprise cut in the Federal Reserve's lending rate to banks sent stocks higher Friday as traders hoped the move would help calm the turbulent financial markets.
The Dow Jones Industrial Average rose 233 points, or 1.8%, to 13,079, and the S&P 500 added 35 points, or 2.5%, to 1446. The Nasdaq Composite gained 54 points, or 2.2%, to 2505. Earlier, the Dow was up more than 300.
The Fed, reacting to a crisis in liquidity conditions that has roiled markets around the world, reduced the discount rate, or the interest rate it charges banks that want to borrow, 50 basis points to 5.75%.
Discount-window borrowing is intended to provide liquidity to individual institutions in the event of urgent short-term funding needs. It differs from the better-known fed funds rate, which is used when banks lend to each other.
A statement from the Fed said that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."
The central bank reiterated that it believes the economy is continuing to expand at a moderate pace, but "downside risks to growth have increased appreciably."
"The Fed's move to cut the discount will certainly help alleviate the liquidity problem," said Peter Cardillo, chief market economist with Avalon Partners. "They left the fed funds rate unchanged, but they said they are monitoring the situation. They were concerned about growth faltering, they acted, and the markets like it."
Separately, the Fed injected another $6 billion of liquidity into the system by way of a three-day repurchase agreement.
Despite the rally, the major averages were still lower for the week. Currently, the Dow has lost 1.7% over the five sessions, the S&P 500 has fallen 1.3%, and the Nasdaq is down 2.3%.
Overseas, Asia's indices were hit hard, but Europe bounced after the Fed cut. Tokyo's Nikkei 225 plummeted 5.4%, and Hong Kong's Hang Seng fell 1.4% overnight. London's FTSE rebounded to jump 3.5%, and Germany's Xetra Dax added 1.5%.
The recent surge in the value of the Japanese yen was partly to blame for the heavy declines in Asia. The yen is at its highest against the dollar in over a year, leaving it poised for its best weekly gain in nearly nine years.
The overseas indices were partly reacting to a roller-coaster day in the U.S. After overcoming a hideous decline on Thursday that had stocks at their worst levels around midday, the Dow finished down just 15.69 points, or 0.12%, at 12,845.78. At one point, the Dow had been lower by 343 points.
The S&P 500 did fully erase its losses, and rose 4.56 points, or 0.32%, to 1411.26. The Nasdaq shed 7.76 points, or 0.32%, to 2451.07, but was well above its lowest mark of the day.
Robert Pavlik, chief investment officer with Oaktree Asset Management, said that while the futures are bouncing for the moment, the Fed's move may not be the end of rampant selling.
"This has stemmed the downward pressure for now, but this is the discount window and not the fed funds rate," said Pavlik. "Mortgage loans are not tied to the discount window. This doesn't help the individual consumer because it doesn't completely straighten out the subprime mess. It's not necessarily going to bring back the market liquidity that helped finance all the leveraged buyout and private-equity deals."
Ian Shepherdson, chief economist with High Frequency Economics, said that traders can only speculate, but "the decision to move the primary discount rate rather than the fed funds rate may indicate that the Fed anticipates some institutional failure as soon as today, probably not a bank, but rather an institution that has substantial bank liabilities that may not be able to clear."
U.S. Treasury bonds, which had been a safe haven for investors as the major averages slid dramatically this week, were losing ground. The 10-year note was lower by 2/32 in price, raising the yield to 4.67%, and the 30-year bond was down 15/32, yielding 4.99%.
Energy and commodity prices were rebounding after falling hard last time. Oil prices dropped $2.33 during the previous session, but finished up 98 cents to close at $71.98 a barrel. Gold futures gained $8.80 to $666.80 an ounce, and silver was higher by 30 cents to $11.80 an ounce.
Among equity names, Countrywide (CFC) was again making headlines. The stock has tumbled 31% this week, falling most recently on news that it has tapped an $11.5 billion credit line in order to fund loans.
Ahead of the open, Banc of America Securities upgraded Countrywide to neutral from sell, saying it believes that the decision to access credit should help the company weather the subprime storm. Shares were jumping $2.23, or 11.8%, to $21.18.
Hewlett-Packard (HPQ) was also in focus after the tech giant posted fiscal third-quarter earnings following the previous close that beat Wall Street's estimates.
H-P also raised fiscal fourth-quarter earnings and sales guidance, and the stock was up $1.39, or 3%, to $47.44.
