US stocks vault higher on Fed cut

The rate cut helped power the rally in share prices

Wall Street shares powered higher after a substantial cut in US interest rates to fight the escalating credit crisis.

The market also took heart on relief that results from two major investment banks were not as bad as feared.

Lehman Brothers and Goldman Sachs both reported sharp falls in profits for the first three months of 2008, but the results were better than expected.

The benchmark Dow Jones index ended up 420.41 points, or 3.51%, at 12,392.66, its biggest one-day gain in five years.

"The earnings this morning allayed investors' fears that there's going to be a hard collapse," said Jim Herrick, director of equity trading at Baird & Co.

In Europe, shares rebounded from Monday's heavy losses with the UK's FTSE 100 index ending up 3.54%. Asian stock markets rallied earlier.

Confidence boost

The Fed has cut US interest rates to 2.25% from 3% in an attempt to restore confidence to nervous financial markets and boost the ailing economy.

The cut was smaller than financial markets had expected, causing the Dow Jones initially to trim gains, but investors were able to shrug off any disappointment and step up their buying spree.

"The economy will likely recover later this year, based on what the Fed is doing," said Chip Hanlon, president of Delta Global Advisors.

"The market is rallying today. It got so oversold that I won't be surprised to see it rally further."

The broader Standard & Poor's 500 Index rose 4.24%, while the technology-heavy Nasdaq climbed 4.19%.

The emergency sale of Bear Stearns over the weekend had rocked the markets.

Investors hope the cut in interest rates will ease the credit crunch by making it easier and cheaper for banks to lend and borrow money.

As the economy has worsened, banks have become reluctant to extend loans to consumers and financial institutions.

Bear Stearns got into trouble when other banks refused to lend it money over fears that it had too many bad debts due to the sub-prime mortgage crisis.

Asian markets were largely higher, Tokyo's Nikkei average closed up 1.5%, Hong Kong's Hang Seng added 1.4% and Mumbai's Sensex was up 2.0%.

But Shanghai's main index fell almost 4% on worries that Beijing will make further efforts to slow the economy.