US stocks rally on rate cut hopes

Shares have been boosted by hopes of an interest rate cut

US stocks have closed up strongly on Wall Street after comments from a Federal Reserve official boosted hopes of an interest rate cut next month.

Banks and other financial stocks led the gains after Fed vice-chairman Donald Kohn said the central bank needed to be "flexible and pragmatic".

Mr Kohn said this was required as the recent credit market squeeze was worse than previously thought.

The main Dow Jones index ended up 2.6% or 332 points to 13,290.

Taken together with the Dow's rise on Tuesday, it represents its biggest two-day gain in five years.

Meanwhile, the Nasdaq index added 3.2% or 82 points to 2,663.

The markets were further boosted by further falls in global oil prices.

Sub-prime debt

A further interest rate cut from the Fed would help ease the credit markets by making it cheaper for banks to lend and borrow money.

The Beige Book report indicates the economy is deteriorating, though not falling off a cliff Doug Roberts, Channel Capital Research

The Fed last lowered rates on 1 November, reducing them to 4.5% from 4.75%.

That followed after a bigger cut from 5.25% to 4.75% in October, the Fed's first reduction in rates in four years.

The credit crunch was sparked in late August by the revelation of billions of dollars worth of bad debt in the so-called sub-prime mortgage sector.

This bad debt came against the backdrop of higher US mortgage rates and a slump in the wider housing market.

A further interest cut from the Fed next month would also give the US property market a much needed boost.

Lower economic growth

Mr Kohn's downbeat assessment was subsequently echoed by the Fed's latest Beige Book economic report.

The weak housing market is hitting US economic growth

It said US economic growth slowed in October and the first half of November due to falling house prices and less available mortgages.

The report "indicates the economy is deteriorating, though not falling off a cliff", said Doug Roberts, chief investment strategist at Channel Capital Research.

Last week the Fed cut its forecast for 2008 economic growth to a range of 1.8% to 2.5% - due to the tighter credit markets and weakness in housing.

In July it had predicted growth of between 2.5% and 2.75% next year.