Stock Market Soars As Fed May Lower Interest Rates

NEW YORK (AP) - Wall Street barreled higher Wednesday for the second day in a row, giving the Dow Jones industrial average its biggest two-day point gain 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.

The market was clearly optimistic that at least some of the damage from the months-long credit crisis was finally being mitigated.

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 percent below its Oct. 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," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "We still have more data to come."

Early Wednesday, Fed Vice Chairman 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 Dec. 11.

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.

According to preliminary calculations, the Dow soared 331.01, or 2.55 percent, to 13,289.45, adding to the blue chip index's 215 point gain on Tuesday and giving the market's best known indicator its biggest two-day point gain since October 2002.

The broader Standard & Poor's 500 index jumped 40.79, or 2.86 percent, to 1,469.02, while the Nasdaq composite index shot up 82.11, or 3.18 percent, to 2,662.91.

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