Fed rate cut drives US shares higher

US shares surged higher yesterday after the Federal Reserve cut interest rates by a quarter point.

The Federal Open Market Committee's (FOMC) decision to cut both the fed funds rate and the discount rate by 25 basis appeared to satisfy the market. Shares fell into negative territory immediately after the decision but then soared above previous highs for the day as traders received the news most had expected.

Stocks surged even as the language used in the statement accompanying the FOMC's decision seemed to play down the likelihood of another rate cut.

The FOMC said it judged that "the upside risks to inflation roughly balance the downside risks to growth". One member of the FOMC dissented, voting to keep the fed funds rate on hold at 4.75 per cent. However, the statement also cautioned that "economic expansion will likely slow in the near-term".

Thomas Nyheim, vice president and portfolio manager at Christiana Bank & Trust said: "I think it's pretty much what was expected. But the language of the Fed's statement looks like this might be the last cut."

Brokerage stocks reacted positively to the Fed's decision while energy and materials stocks also surged higher.

The S&P investment bank index gained 2.3 per cent at 211.51. Goldman Sachs rose 3.2 per cent at $247.92 while Merrill Lynch was up 1.2 per cent at $66.02. But Citigroup fell 0.5 per cent at $41.90 after Morgan Stanley cut its rating.

In earnings news Kraft Foods reported a 20 per cent fall in third-quarter profit compared with a year-ago, which had included a one-time gain. But excluding the gain, Kraft beat estimates. The shares rose 2.5 per cent at $33.41.

Alcatel-Lucent, the telecoms equipment maker, reported a loss of some $373m for the third quarter, slightly larger than analysts' expectations. But news of 4,000 more job cuts lifted the stock 3.2 per cent to $9.69.

Weyerhaeuser was also higher in spite of a 55 per cent fall in net income as the US housing slump hit demand for its timber products. The shares were up 2.2 per cent to $75.91. Third-quarter profit at Newmont Mining doubled to $397m. The shares gained 9.6 cent to $50.90. - (Financial Times service)