Stocks Rise Ahead of Expected Rate Cut

Stocks on Wall Street trade with gains as investors anticipate a key interest-rate cut from the Fed.
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Updated from 9:39 a.m. EST

Stocks on Wall Street are trading with gains Tuesday, as investors anticipate an interest-rate cut from the

Federal Reserve

later in the day.

The

Dow Jones Industrial Average

gained 127 points to 8691, and the

S&P 500

was up 17 points at 885. The

Nasdaq

climbed 40 points to 1548.

The

Federal Reserve

continues with the second day of a two-day meeting today and is expected to announce at 2:15 p.m. EST that it will lower the key U.S. official interest rate, known as the fed funds target rate, by another half point.

The Fed has moved benchmark short-term rates down to historically low levels, and the expected cut today would bring the federal funds target rate to 0.5%. In effect, the move expected today ratifies recent declines in short-term market rates. Nonetheless, they need to keep target rates moving down, says Brian Bethune, director of financial economics at Global Insight. "They can't leave any ammunition unspent; the economy is on track in 2008:Q4 to contract at the deepest percentage since the 1980s."

Also keep in mind, he says, the effect of fed funds target rate cuts is a very narrow view of what the Fed can do. "Once they get to 0% on the short-term rates, they can still buy longer-term treasuries and support other areas of the term borrowing markets, including mortgage debt and term securitized debt," he says.

Indeed, the surprise on Tuesday will be if the Fed goes beyond the cut and announces it will buy back more commercial debt in bonds or asset-backed commercial paper held by U.S. banks, or government bonds from the U.S. Treasury, said Marc Pado, U.S. market strategist at Cantor Fitzgerald, on Monday.

The government announced early Tuesday that

new home construction and building permit applications

fell for the fifth consecutive month in November -- slightly more so than consensus expectations.

The most widely cited inflation indicator, the Consumer Price Index, a measure of the price level of a fixed market basket of goods and services purchased by consumers, also declined more than expected. Excluding food and energy, the "core rate" of inflation was 0 for November. CPI is used to calculate cost of living adjustments (COLA) for government programs and private labor agreements.

Economists are expecting another decline in December, bringing the CPI down to zero, says Bethune, so prices will go to an outright decline in 2009.

"It creates a lot of pressure in the sense that if you're a producer and product prices decline, you're going to scramble to cut production," says Bethune. "You certainly don't want any inventory sitting around, because the valuations are going to decline." In the automotive and computer industries, for instance, this would exacerbate downward pressure on production in the short term.

"It's very troubling in terms of the short-term outlook," he says, "but, of course, the positive benefits are it reduces inflation expectations, and brings interest rates down -- in some respects, it's a bit of a Christmas gift for the consumer." Lower fuel costs, especially, should help give the consumer a little more wriggle room for discretionary spending and ideally will bring down consumer borrowing costs, he says.

Goldman Sachs

(GS) - Get Report

announced its first quarterly loss as a public company early Tuesday. The company reported a loss of $2.12 billion, or $4.97 a share, while Wall Street analysts had predicted a loss of $3.73 a share.

In other earnings news,

Best Buy

reported a 77% decline in third-quarter profit and announced a plan to cut capital spending by 50% in 2009.

In

analyst actions

, Goldman upgraded

Baidu

(BIDU) - Get Report

to its Conviction Buy list, sending shares of the China-based Internet company higher in Tuesday trading.

Meanwhile, there remained no new word about the progress of temporary help for the U.S. auto industry, while Chrysler and

General Motors

(GM) - Get Report

have said they may have only weeks of sustainability remaining.

The White House has said it might now be willing to use money drawn from the $700 billion Wall Street bailout, known as the Troubled Asset Relief Program (TARP). The Treasury also said it's prepared to pitch in after a federal rescue plan for Detroit's Big Three Automakers --

Ford

(F) - Get Report

, GM and Chrysler -- failed to pass the Senate last week.

Tracking commodities, after edging up at the session's open, crude oil was recently down 51 cents to $44 a barrel. OPEC is scheduled to meet on Wednesday to evaluate the effectiveness of its earlier decision to cut production targets by 1.5 million barrels per day, and to weigh the need for more cuts. Another equal or greater OPEC production cut, which could help stabilize oil prices that have fallen with global economic hardships, is expected.

Gold was down $1.10 to $835.40 an ounce.

Longer-dated U.S. Treasury securities were rising in price. The 10-year was rising 1.5/32, to yield 2.5%, and the 30-year was rising 20/32, yielding 2.9%. The dollar was weaker against the euro, pound, and yen.

Overseas, European exchanges such as the FTSE in London and the DAX in Frankfurt were edging higher -- up 0.4% and 1.5%, respectively. In Asia, Japan's Nikkei ended lower, while Hong Kong's Hang Seng ended with slight gains.

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