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NEW YORK : US stock markets staged a powerful rebound on Tuesday as the Federal Reserve slashed its main interest rate by 75 basis points to offset a broadening credit crunch.
Investors applauded the move saying it should help boost liquidity in the stressed banking sector following the near collapse of US investment bank Bear Stearns last week.
The leading blue chip Dow Jones Industrial Average rallied 420.41 points (3.51 percent) to close at 12,392.66, marking its biggest one-day point gain since July 2002.
The tech-heavy Nasdaq composite meanwhile jumped 91.25 points (4.19 percent) to finish at 2,268.26 and the broad-market Standard & Poor's 500 index rocketed 54.14 points (4.24 percent) to close at 1,330.74.
Despite the gains, the markets remain down for the year-to-date due to concerns that the world's largest economy is sliding into a recession. The multi-billion dollar losses of some Wall Street banks on soured mortgage investments have also battered confidence this year.
Traders said the rate cut and better-than-expected earnings from Goldman Sachs and Lehman Brothers had given Wall Street a much needed shot in the arm.
The US central bank cut its key federal funds interest rate by 75 basis points to 2.25 percent in a bid to boost liquidity and fire up economic growth which has been threatened by the credit squeeze and a sharp housing slump.
Fed policymakers said its actions, "should help to promote moderate growth over time and to mitigate the risks to economic activity."
Investors widely applauded the Fed's decision to cut rates again, following sustained rate cuts since September, saying it could provide relief to the banking sector which has tightened lending and is seeking to preserve cash.
"The Fed is rapidly using up all its bullets but there is no other choice," said Joel Naroff of Naroff Economic Advisors.
"It will probably have to use more up before the coast is clear. Ultimately, I believe the Fed will succeed in keeping us out of a steep and protracted recession and I still feel that the economy will be up and running by the end of the year."
The housing woes, the credit meltdown, rising job cuts and sky-high crude oil prices have dented US economic momentum and a growing number of economists believe the economy has already fallen into a recession.
Although most investors were focused on the Fed, a government report on Tuesday showed that US housing starts fell 0.6 percent in February to a seasonally-adjusted annual rate of 1,065,000.
Despite the decline in new home construction, the level of starts was better than most forecasts, prompting some analysts to wonder if the multi-year housing downturn was finally bottoming out.
Goldman Sachs and Lehman Brothers, two of Wall Street's biggest investment banks, meanwhile both announced sharp declines in quarterly profits, but their respective earnings were better than most analysts had predicted.
Goldman's chairman and chief executive, Lloyd Blankfein, said "market conditions are clearly very difficult," while his counterpart at Lehman, Richard Fuld, said the banking industry was facing "challenging" times.
Goldman Sachs's fiscal first-quarter earnings plunged 53 percent to 1.51 billion dollars compared with the same period a year earlier while Lehman's fiscal first-quarter profits slumped 57 percent to 489 million dollars.
Lehman's shares closed up 46 percent at 46.49 dollars while Goldman's stock jumped 16 percent to 175.59 dollars.
Other financial shares also rose in the wake of the Fed's rate cut days after Bear Stearns agreed to be bought for the bargain basement price of 236 million dollars by JPMorgan Chase rather than face possible bankruptcy.
Bond prices dropped as investors moved money back into equities.
The yield on the 10-year US Treasury bond rose to 3.451 percent from 3.314 percent on Monday and that on the 30-year bond increased to 4.329 percent against 4.282 percent. Bond yields and prices move in opposite directions. - AFP/de
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