Nasdaq Soars 12% on Rate-Cut Euphoria

Updated from 1:20 p.m. EST:

The Federal Open Market Committee Wednesday shocked investors by cutting its key federal funds target rate by 50 basis points, to 6%. Stocks rallied sharply on the news: The Dow jumped 300 and the Nasdaq added 250, or 12%, as investors bet that lower rates will entice money back into the stock market.

Look Familiar? Nasdaq's Fed rally

Speculation that the Fed would make such a move had risen over the past week, particularly after a poor Purchasing Manager's Index yesterday showed that the economy may be slowing even more quickly than believed.

Worry Warts?

The Fed signaled its concern over the economy at its Dec. 19 meeting, when it shifted its policy stance, or bias, from tightening (signaling the Fed was worried about inflation) to easing (signaling the primary worry is recession). Typically, the Fed shifts its view more gradually. Nevertheless, many investors were disappointed that the Fed didn't cut outright at that point, and stocks sold off on the news.

At the close yesterday, the January fed funds futures implied a 55% chance of the Fed cutting rates by a quarter-point before its meeting at the end of the month. Still, many economists reckoned the Fed would avoid cutting now.

"An intermeeting move leads to questions of whether there's a crisis going on," J.P.Morgan financial economist Marc Wanshel told TheStreet.com yesterday. "Barring something much worse than what we're seeing right now, the Fed doesn't want to do that."

Typically, the Fed moves on rates only at its regularly scheduled meetings. This is the first intermeeting move since the fall of 1998, when it cut rates in response to market fallout from the Russian debt crisis.

Roll the Boilerplate

In its press release announcing the rate cut, the FOMC said, "These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power.

"Moreover, inflation pressures remain contained," the FOMC continued. "Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating."

The Fed also cut the discount rate -- the rate it charges member banks for loans -- by 25 basis points, to 5.75%.

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