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Stocks Ramp on Fed Rate Cuts

The three major indices run higher following the central bank's decision to cut key interest rates by 25 basis points.
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Updated from 1:07 p.m. EDT

Stocks in the U.S. continued their climb Wednesday after the

Federal Reserve

cut the fed funds rate by 25 basis points, as expected, on the heels of economic data suggesting that the economy is holding up a bit better than had generally been thought.


Dow Jones Industrial Average

jumped 148 points, or 1.2%, to 12,980, and the

S&P 500

was rising 11 points, or 0.8%, at 1402. The

Nasdaq Composite

tacked on 19 points, or 0.8%, to 2445.

The quarter-point easing brings the fed funds target rate to 2%. The discount rate, or that at which the Fed lends money to banks, was also lowered by a quarter point, to 2.25%. In its decision, the Federal Open Market Committee, the policymaking arm of the Fed, cited financial markets that remain "under considerable stress," a softening labor market, tight credit conditions and the deepening housing contraction.

The FOMC also implied -- also as widely anticipated -- that it will pause the rate-easing cycle that has, at this point, pulled the fed funds rate down by 325 basis points since September. "The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity," the FOMC statement said.

The Fed also noted the relentless upward drive in commodities prices lately and said that it will continue to monitor those developments carefully, but it expects inflation to moderate in coming quarters. In similar fashion to the last rate-cut decision, two members -- Richard Fisher of Dallas and Charles Plosser of Philadelphia -- dissented, believing that the Fed shouldn't have cut the fed funds rate at all.

"I'm a big believer that this has been a large, orchestrated stimulative effort to add liquidity back to the banks by cutting the fed funds rate, and allowing for a broader spread so the banks can make handle losses and not go under," said Pado.

"Inflation may run a little bit higher," he added, "but they're willing to let inflation run if they can avoid recession."

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As for the equities market, buyers had an edge from the outset after the Commerce Department issued a preliminary gross domestic product report that showed growth of 0.6% in the first quarter, a hair higher than con sensus and flat with last quarter. GDP numbers often undergo revisions. If they remain substantively accurate, though, they would indicate that the U.S. economy, at least for now, has

avoided a recession

, contrary to what many economists and consumers previously believed.

"Call it a banana, call it ice cream, call it a monkey, but you can't call it a recession," said Richard Yamarone, chief economist with Argus Research, who blames the media for much of the recessionary angst that have spread through the American public over the past few months.

"In order for the economy to be in recession there needs to be, at the very least, one negative quarter in economic growth," Yamarone said. "To date, that hasn't occurred. Claiming recession while economic output is expanding is like diagnosing a patient with the sniffles as having pneumonia. It's incorrect, it's irresponsible, and in our opinion, just another example of election-year fear-mongering."

Marc Pado, U.S. market strategist with Cantor Fitzgerald, pointed out that the housing slump alone dragged on the GDP by 1.3%. "Add that back in, and it wouldn't be a robust economy, but it's not the end of the world at just 2%. So there's a portion of the economy that's in a recession, but it's a sector-related situation."

Pado also believes the Bush administration's tax-rebate checks should pull the second quarter from the brink as inventories rebuild and exports continue to perform well. Further, he added, it's unlikely housing will maintain its harrowing rate of decline. "So where's your recession?" he said.

Yamarone conceded that consumers are facing "great difficulties" in spiking food and energy prices, an uncertain jobs climate and sinking home prices. Still, he believes the economy will "narrowly sidestep recession," barring any other financial calamities, especially now that the stimulus checks are arriving in the first month of the quarter rather than later on.

"We'll just have to wait for banks to start lending again," he added. "Because if you're a bank and you're not lending, what are you doing?"

Elsewhere on the economic docket, the April Chicago Purchasing Managers' index came in at 48.3, indicating a slight contraction in Midwest factory activity. That's a bit better than the 47.5 reading that economists were expecting, and nearly unchanged from March numbers. The index's breakeven point is 50.

Also, ADP said that nonfarm payrolls rose by 10,000 workers in April, far better than the consensus forecast for a loss of 60,000 jobs, and up from a revised gain of 3,000 jobs in March. The government's official jobs report should come out Friday, and the two reports don't always agree.

On the corporate side,

General Motors

(GM) - Get General Motors Company Report

helped keep the Dow aloft even though the carmaker widened its first-quarter shortfall. Stripping out certain items, GM topped Thomson Financial's $1.60 analyst targets with a loss of 62 cents a share. The stock soared 13.2%.

Fellow industrial

Proctor & Gamble

(PG) - Get Procter & Gamble Company (The) Report

meanwhile posted rising first-quarter earnings of $2.71 billion, or 82 cents a share, edging past the consensus analyst estimate by a penny a share. P&G also bumped up the lower end of its current-quarter outlook by 2 cents a share. The stock rose 3.6%.

Another Dow component,


(C) - Get Citigroup Inc. Report

, dropped 2.7% after the banking behemoth announced after the prior market close that it plans to offer $3 billion in stock in order to shore up its dwindling cash pile.



(IR) - Get Ingersoll Rand Inc. Report

tracked up 6.2% on a surging first-quarter profit from continuing operations, but

International Paper

(IP) - Get International Paper Company Report

said rising commodities prices, among other things, helped pull down its first-quarter results, and shares were sliding 4.8%.

Separately, IT-services firm



was downgraded by at least three analysts after swinging to a first-quarter loss and chopping down its full-year sales forecast. Shares were plummeting 23.9%.

Among other quarterly reports,





(GRMN) - Get Garmin Ltd. (Switzerland) Report

missed estimates, bringing shares down 4.7% and 9.6%, respectively, while



guided estimates higher for the year. Kraft shares were up 3.4%.

Time Warner


was slightly worse than expected with its profit. Shares had a positive start as shareholders seemed to commend the media company's decision to split off its cable unit,

Time Warner Cable


, but recently the stock was off 0.7%.

Crude oil saw some choppy action after the Energy Information Administration said crude stockpiles rose by 3.8 million barrels last week, and was lately down $1.94 at $113.69 a barrel. Gold futures were losing $7.30 at $869.50 an ounce.

The U.S. dollar firmed fractionally against the euro to $1.5556 while adding 0.5% against the yen at 104.52.

Treasury prices were little changed recently, having pulled back from more substantial early gains. The 10-year note ticked up just 1/32 in price to yield 3.82%, and the 30-year bond was flat in price, yielding 4.55%.

The major overseas markets were mixed. In Asia, Tokyo's Nikkei 225 lost 0.3% overnight to 13,850, and Hong Kong's Hang Seng Index shed 0.6% at 25,755. As for Europe, the FTSE 100 in London, was dipping, but Germany's Xetra Dax lifted by 0.9%. The Paris Cac was up 0.4%.