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Stocks Soar After Fed's Dramatic Rate Cut

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 zero to 0.25 percent, the lowest level on record and the first time policy makers have set a range instead of a specific target. The target rate had been at 1 percent.

The Dow Jones Industrial Average rose 359.61, or 4.2 percent — triple its gain before the Fed move — to close at 8924.14. The S&P 500 index rose 5.1 percent, and the Nasdaq gained 5.4 percent.

"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 facilitate 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.

All 30 Dow stocks ended higher, with banks at the top of the pack, led by JPMorgan, which gained 13 percent. Citigroup jumped 11 percent, while Bank of America gained 7 percent.

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.

>> See a preview of Morgan Stanley's earnings.

"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.

Still, Goldman ended up 14 percent, while Morgan Stanley shot up 18 percent.

Shares of General Electric rose 5.7 percent after the Dow component and CNBC parent backed its earnings target for 2008 but said it would no longer provide guidance.

The economic news was once again dismal -- housing starts plunged 18.9 percentto a record low annual rate of 625,000 units and consumer prices tumbled 1.7 percent in November, but the market shrugged off the data, maintaining a gain throughout the day.

"When bad news produces good results, that is a very good development," observed Al Goldman, chief market strategist at Wachovia Securities, noting that economic news has been terrible for the past three weeks, yet the market has risen 20 percent.

"No one knows when a market is totally washed out," Goldman says, but one strong indicator is when bad is good."

Best Buy rocketed 18 percent after the electronics retailer beat expectations for the third quarter and said 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.

Still, Bernard Madoff's alleged Ponzi scheme hung over the market like a saturated cloud.

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 rose 4.2 percent, while Ford slipped 1.6 percent.

Ford CEO Bill Ford said the Ford family is "obviously interested and concerned" about the auto maker's tough financial situation but would prefer to handle its turnaround on its own.

Still to Come:

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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