Stocks Fly After Fed Cut

Updated from 4:16 p.m. EDT

A surprise cut in the Federal Reserve's lending rate to banks sent stocks higher Friday as traders hoped the move would help bring some calm to the turbulent financial markets.

The Dow Jones Industrial Average rose 233.30 points, or 1.82%, to 13,079.08, and the S&P 500 added 34.67 points, or 2.46%, to 1445.94. The Nasdaq Composite gained 53.96 points, or 2.2%, to 2505.03. Earlier, the Dow was up more than 300.

The Fed, reacting to a crisis in liquidity conditions that has roiled markets around the world, reduced the discount rate, or the interest rate it charges banks that want to borrow, 50 basis points to 5.75%.

Discount-window borrowing is intended to provide liquidity to individual institutions in the event of short-term funding needs. It differs from the better-known fed funds rate, which is used when banks lend to each other.

A statement from the Fed said that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."

The central bank reiterated that it believes the economy is continuing to expand at a moderate pace, but "downside risks to growth have increased appreciably."

"The Fed's move to cut the discount will certainly help alleviate the liquidity problem," said Peter Cardillo, chief market economist with Avalon Partners. "They left the fed funds rate unchanged, but they said they are monitoring the situation. They were concerned about growth faltering, they acted, and the markets like it."