Stocks Soar as Fed Dramatically Cuts Rates

Stocks shot up Tuesday after the Federal Reserve dramatically cut interest rates.

The Fed slashed its target for the federal funds rate to a range of 0 percent to 0.25 percent, the lowest level on record and the first time policy makers have set a range for the instead of a specific target. The target rate had been at 1 percent.

The Dow Jones Industrial Average was up more than 350 points after the shocking move, more than doubling its gain before the announcement.

"So here we are: Rock bottom," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote of the Fed's decision in a note to clients. This "is a reflection of an utterly desolate economic picture, which will persist for the foreseeable future."

The central bank also pledged to use "all available tools" to bandage the U.S. economy, heralding a new era for the Fed, in which it will have to reach into its quiver for tools other than rate cuts.

Specifically, they pledged: to purchase large quantities of agency debt and mortgage-backed securities in the next few quarters and to implement early next year the Term Asset-Backed Securities Loan Facility to faciliate lending to individuals and small businesses. The committee is also mulling other options, including buying longer-term Treasury securities.

"If zero rates don't work, they will try anything; good," Shepherdson said. "But this is a terrible, chastening day."

And, while most economists are encouraged by the Fed's proactive stance, an increasing number are saying that this thing is going to bleed into the next decade.

"[T]he action taken today and the quantitative easing moves to come speak volumes about just how petrified policy makers are that the economy is in danger of sliding into a deflationary spiral that would be disastrous considering the highly leveraged condition of the economy," said Joshua Shapiro, chief U.S. economist at MFR Inc.

MFR thinks the U.S. will avoid a deflationary spiral but "it is quite possible that recessionary conditions persist well into 2010 or even longer than that," Shapiro said.

Bank stocks were the top gainers on the Dow, with JPMorgan leading the pack. Citigroup and Bank of America also rose sharply.

Citigrouppleased investors with news that it plans tosell its Japan trust banking unit.

Bank of Americajoined the rally, even after Friedman, Billings, Ramsey slapped the stock with an "underperform" rating, saying the bank's equity ratio is too low and that it will have to raise a "substantial" amount of capital, which would dilute existing shareholder value.

There was some relief with Goldman Sachs earnings out of the way — the brokerage reported a quarterly loss of $4.97 a share, well off the $3.73-per-share loss expected.

Morgan Stanley reports earnings on Wednesday; analysts expect a loss of 34 cents a share, according to Thomson Financial.

"Expectations are very low for the sector today and that may mean there's some kind of a floor set here," Robert Lutts, chief investment officer at Cabot Money Management in Salem, Mass., told Reuters.

On the economic front, housing starts plunged 18.9 percentlast month to a record low annual rate of 625,000 units, as building permits dropped 15.6 percent.

Consumer prices tumbled 1.7 percent in November, the second straight record drop, amid a 17-percent decline in energy costs. Excluding volatile food and energy prices, core CPI was flat.

>> CPI Breakdown: Where prices are rising—and falling

Shares of Best Buy shot up about 15 percent after the electronics retailer reported its profit sank in the third quarter and that it planned to offer buyout packages to nearly all employeesin order to cut costs. The retailer also said it would cut capital spending next year by 50 percent.

Further fallout from Bernard Madoff's alleged Ponzi scheme could drag on the markets as the day progresses, and light pre-Christmas volumes could make stock moves highly volatile.

A federal judge has ordered that the fallen titan's firm, Bernard L. Madoff Securities, be liquidated. Meanwhile, as more heartbreaking tales from victims emerge, some are claiming that there was a conflict of interest at the SEC, which should have cracked down on the firm's wrongdoings sooner.

As the scale of the alleged fraud grows, Madoff's close connection with regulatorsis being scrutinized.

The fate of the Big Three auto makers remained uncertain following the failure of a proposed bailout bill in the Senate. The Bush administration may announce plans to use could use part of the $700 billion fund designed to stabilize the financial sector to backstop the car makers.

Shares of General Motors and Ford advanced.

This Week:

TUESDAY:Fed decision at 2:15pm ET; Earnings after the bell from Adobe
WEDNESDAY: Weekly mortgage applications; Current account; weekly crude inventories; Earnings from Morgan Stanley, Nike
THURSDAY: Weekly jobless claims; Leading indicators; Philly Fed; weekly natural-gas inventories; Fed's Fisher speaks; Earnings from FedEx, Pier 1, Rite Aid, Oracle, Palm, Research In Motion
FRIDAY: Quadruple witching

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