Dow Leaps 330 Points on Hint of Rate Cut

Wall Street barreled higher today for the second day in a row, propelling the Dow Jones industrials its biggest two-day point gain in five years after a Federal Reserve official hinted that the central bank may lower interest rates again.

Investors' renewed hopes for a rate cut added to their relief that companies that made losing bets on subprime mortgages, such as Citigroup Inc. and Freddie Mac, are coming up with ways to raise cash.

However, Wall Street has been fickle in recent months, and no one is betting that the mortgage crisis that tripped up the nation's financial industry this year is over, or that the market's huge gains so far this week will stick. Despite its spectacular advance this week, the Dow remains 6% below its October 9 record close over 14,000, having plunged due to worries that the housing market's slump will lead to further losses for banks, and that the Fed can't keep slashing rates.

"The market's perception of whether the Fed cuts or not really changes by the day," a chief market strategist at Spencer Clarke LLC, Michael Sheldon, said. "We still have more data to come."

Early today, the vice chairman of the Fed, Donald Kohn, told the Council on Foreign Relations that recent financial turbulence has reversed some of the improvement seen in markets in previous weeks, and could squeeze credit for households and businesses. He said tight financial conditions may merit "offsetting" policy from the central bank.

The possibility for lower rates seemed more compelling to investors than persistent concerns about a slowdown economic growth. The Fed has already reduced rates at its last two meetings, and continues to inject billions of dollars into the financial system through repurchase agreements to help calm the shaky markets. The central bank will hold its final rate-setting meeting of the year on December 11.

"Everything we're seeing in the market is revolving about credit and encouragement that the Fed is going to bail us out again," an economist and market analyst for Chicago-based Barrington Research, Alexander Paris, said. "Investors are kind of ignoring the economic news like housing and durable orders that were all weaker than expected."

Indeed, signs that the Fed will reduce rates to keep cash flowing freely helped overshadow reports showing that in October, sales of existing homes fell for the eighth consecutive month and orders for big-ticket manufactured goods fell for the third straight month.

Plunging oil and gold prices also lifted investors' hopes for a rate cut — if inflation is in control, policy makers have less reason to keep rates high. The Fed's Beige Book of economic activity around the country said with the expanding at a reduced pace, most core prices are stable or down slightly.

The Dow soared 331.58, or 2.56%, to 13,290.02, adding to the blue chip index's 215 point gain yesterday and giving the market's best known indicator its biggest two-day point gain since October 2002.

Wall Street has had a volatile week so far.

Economic and credit market concerns sent the Dow plunging 240 points on Monday, pushing the index to the level of a 10% market correction before rebounding yesterday. Investors, though still anxious about the credit market crisis and losses at major financial institutions, found some consolation when investment arm of Arab city state Abu Dhabi invested $7.5 billion in Citigroup.

Then, late yesterday, government-sponsored mortgage investor Freddie Mac halved its dividend and said it would sell $6 billion of preferred stock.

As recently as Monday, the S&P 500 index was in negative territory for the year.

"Assuming the economy doesn't go into recession, which at this point continues to be our call, the recent decline in major averages should set up for a short-term rally in the markets," a chief market strategist at Spencer Clarke LLC, Michael Sheldon, said. However, he added, "the economy continues to face a significant number of headwinds in the months ahead.