Stocks Sail On Fed's New Tack
Steve Schaefer, 03.11.08, 10:40 AM ET
The Federal Reserve surprised and delighted the U.S. stock market Tuesday morning, sending shares higher at the open.
No, the central bank did not provide another emergency inter-meeting cut to interest rates, but it did take a new step to tackle the liquidity crisis in the U.S. credit markets.
The Fed announced a new Term Securities Lending Facility. under which it will lend $200 billion of Treasury securities to primary dealers secured for a 28-day term by other forms of collateral, including mortgage-backed securities. (See: "Fed To The Rescue!") That's significant because the U.S. subprime mortgage crisis has put pressure on the entire home-loan industry, including the creditworthy sector that underlies many mortgage-backed bonds.
The move represents a new tack for the Fed, which has tried for months to get stingy lenders to loosen their purse strings by easing monetary policy -- essentially making it unprofitable to keep money in the bank. Since mid-September rate cuts have dropped the central bank's benchmark short-term federal funds rate to 3.0% from 5.25%.
Futures markets popped when the Fed announced the lending facility an hour before the open and the gains held once the bell sounded. The Dow Jones industrial average was up 271 points to start the day, rising 2.3%, to 12,011, while the Standard & Poor's 500 added 28 points, or 2.2%, to 1,301, and the Nasdaq gained 52 points, or 2..4%, to 2,221.
Meanwhile, the Fed also announced increases to its temporary reciprocal currency arrangements with the European Central Bank and the Swiss National Bank, which will now provide lines of credit up to $30 billion and $6 billion to the two central banks, respectively, and extend those lines through Sept. 30.
The Fed news hit as the likelihood of rate cuts abroad dimmed Tuesday morning. ECB Council Member Axel Weber said inflation concerns mean the central bank is unlikely to cut rates and could lead to a rate hike, according to TradeTheNews.com. (See: "Inflation Keeps Europe On Hold")
The bullish open on Wall Street had mixed meaning for investors. It remains unclear whether the jump was based on the market being oversold over the past several sessions, or if it came from optimism that the Fed's latest move will have its desired effect of loosening lending conditions.
Soaring equities came at a cost for the bond market, as prices eased. The 10-year note was yielding 3.58%, up from 3.46% Monday, and the two-year's yield was at 1.76%, up from 1.47%.
Still, the market bears careful watching, as the morning spike could give way to afternoon profit-taking.
Either way, the financial sector raced higher to start the day thanks to the announcement from the Fed.
Dow component Citigroup (nyse: C - news - people ) added $1.40, or 7.1%, to $21.09 to start the day, while battered mortgage firms Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) each gained more than 10%. (See: "Fannie And Freddie Promise To Play Nice")
The Financial Select Sector SPDR (amex: XLF - news - people ), an exchange-traded fund that corresponds to the financial offerings of the S&P 500, gained $1.10, or 4.7%, to $24.73.
In other news, European Union regulators approved Google (nasdaq: GOOG - news - people )'s $3.1 billion bid for online ad tracker DoubleClick. The regulators dismissed concerns that the deal would give Google an unfair advantage over competitors, ruling that DoubleClick is not currently one of its rivals. (See: "Pressure Mounts Against Google-DoubleClick")
Shares of Google bounced off recent 52-week lows, gaining $18.98, or 4.6%, to $432.60.
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