Stocks, Bonds Gain on News of No Rate Hike

Stock prices jumped and bond yields fell Tuesday as investors cheered the Federal Reserve Board’s decision to hold interest rates steady.

The Dow Jones industrial average, which spent most of the session mired in the minus column, exploded in midafternoon trading to end with a gain of 74.58 points at 7,303.46. This was within striking distance of the record 7,333.55 set Thursday.

Broader market measures also turned higher after Tuesday’s anxiously awaited Fed meeting produced no change in monetary policy. The Nasdaq composite index jumped 22.64 points, or 1.7%, to 1,363.88 amid big gains in technology stocks.

Winners topped losers by 14 to 10 on the New York Stock Exchange and by 21 to 18 on Nasdaq.

In the bond market, yields fell across the board soon after the Fed adjourned its meeting. But the decline was most pronounced among shorter-term issues, which naturally are most affected by changes in the Fed’s benchmark short-term interest rate, the federal funds rate.

The Fed left that rate unchanged at 5.5%.

In bond trading, the yield on the six-month Treasury bill plunged to 5.47% from 5.62% on Monday.

Longer-term yields, however, didn’t decline much. The 30-year T-bond yield eased to 6.90% from Monday’s 6.92%.

“Both the bond market and the Fed have correctly paid attention to” reports suggesting the economy is losing steam, said Scott Grannis, who helps manage $30 billion in bonds for Western Asset Management in Pasadena.

Bonds overcame early losses suffered when the dollar fell to a five-month low against the yen, raising concern that Japanese investors will purchase fewer Treasury securities.

The debate over whether the economy’s vigorous pace was easing enough to keep inflation in check had raged since late March, when Fed officials boosted the federal funds rate to 5.5% from 5.25%.

For months, economists have been concerned that heavy consumer demand will aggravate inflationary pressures such as rising production costs. But after the March rate hike, investors grew fearful the Fed would hurt company revenues by slowing the pace of borrowing and spending too drastically.

Naturally, almost as soon as the Fed guessing game ended Tuesday, the debate turned to the potential outcome of the next Fed meeting July 1-2.

Investors have concluded that a July rate hike “is completely off the table unless we get evidence of surprisingly strong economic activity this summer,” said Jim Weiss, deputy chief investment officer for equities at State Street Research & Management Co. in Boston.

Others, however, warned that the Fed could easily decide to boost rates in July if it believes that inflation risks are rising.

Among Tuesday’s highlights:

* Brokerages and financial issues, whose fates are closely tied to interest rates, scored big. Citicorp rose 3 7/8 to 119 7/8. Merrill Lynch rose 5 to a record 104 5/8. Insurer American International Group rose 1 1/2 to 132 3/8.

* Nasdaq was propelled by big tech issues. Intel rose 6 1/4 to 161 after a Merrill Lynch analyst made positive comments about the company’s long-term sales growth. Also, Dell Computer rose 2 1/8 to 99 5/8, an all-time high; Cisco Systems jumped 3 7/16 to 64 3/8; Intuit added 2 1/4 to 28 1/4; and Advanced Micro Devices increased 2 1/4 to 42 1/4.

But C-Cube Microsystems fell 5 5/8 to 19 7/8 after the maker of chips for video-CD movie players forecast disappointing earnings.

* A number of retailers reporting positive earnings rose. Home Depot added 1 to 60 3/4, AnnTaylor rose 5/8 to 24 and Dayton Hudson added 2 to 49.