Key Indexes Wax as Fed Lowers Interest Rate
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

More bullish news could lie ahead, following a day when every major index surged after the Federal Reserve Bank cut its key interest rate by half a point — its most aggressive rate reduction in four years.
The market was already buoyant yesterday on news that Lehman Brothers Holdings Inc. posted better than expected third-quarter results. Lehman Brothers, which reported a net income loss of 3.2%, was the first of several large investment banks with earnings releases this week, and analysts expect others to post stronger earnings.
“It paints an optimistic picture for the other large banks,” a senior economist with Moody’s Economy.com, Marisa Di Natale, said. “The fact that their income was only down about 3% over the year is a good sign, because they were heavily invested in subprime mortgages and underwrite more mortgage loans than the other banks.”
Today, Morgan Stanley is scheduled to report its third quarter earnings, with Goldman Sachs Group Inc. and Bear Stearns Cos. to follow tomorrow. These banks were among the big winners yesterday, with Morgan Stanley’s stock up 5.6%, to $68.51, Goldman Sachs shares surging 6.9%, to $200.50, and Bear Stearns’s stock rising 3.3%, to $119.20. Lehman Brothers also saw a 10% uptick in its stock price yesterday, to $64.49.
The S&P 500 added 27.64, to close at 1,504.29, the Nasdaq Composite Index gained 43.33, to 2,624.99, and the Dow Jones Industrial Average went up 204.20, to 13,607.62, just minutes after the announcement, and closed up 335.97 points.
The looming credit crisis and problems in the subprime mortgage market have had analysts worried about the performance of many of the large investment banks. Lehman Brothers took a hit of $1.06 billion in its loan commitments to private equity firms and mortgage-related assets. Its net income was $887 million, or $1.54 a common share. Analysts polled by Thomson Financial had predicted earnings of $1.47 a share.
“Despite challenging conditions in the markets, our results once again demonstrate the diversity and the financial strength of the Lehman Brothers franchise, as well as our ability to perform across cycles,” the chairman and CEO, Richard Fuld Jr., said in a statement.
“The quarter could have been worse,” an analyst for Deutsche Bank, Michael Mayo, wrote in a note to investors.
Investor confidence following the relatively strong results from Lehman Brothers was further boosted when the Fed cut the federal funds rate, or that rate banks charge each other on overnight loans, to 4.75% from 5.25%.
“More than anything,” the rate cut “will boost confidence,” Ms. DiNatale said. “It sends a clear signal to investors that the Fed is engaged and ready to act.”
The rate cut is critical for consumers because it will likely mean that the prime lending rate, which is now at 8.25%, could fall by the same half point. A lower rate would increased loans and spending, pulling up the economy.
The Fed mentioned the mortgage crisis and housing troubles as a reason for its move.
“The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,” the Fed said in a statement. “Today’s action is intended to help forestall some of the adverse effects on the broader economy.”
Yesterday’s move was the first time that America’s central bank has lowered rates since 2003. It’s also the strongest Fed action under the leadership of its current chairman, Ben Bernanke.
The Fed has shied away from rate hikes due to fears of inflation, but yesterday the agency indicated the severity of the credit crunch overcomes inflation concerns.
“Readings on core inflation have improved modestly this year,” the Fed said, adding that “some inflation risks remain, and it will continue to monitor inflation developments carefully.”