Stocks soar as Fed makes bold rate decision

By Caroline Valetkevitch

NEW YORK (Reuters) - Stocks jumped the most in four years on Tuesday after the Federal Reserve slashed interest rates and raised hopes the economy could ride out a prolonged housing slump and turmoil in the credit market.

The cut in the Fed's benchmark short-term rate, the first in four years, was more aggressive than many investors had expected. The market responded by pushing the S&P 500 to its biggest percentage gain since March 2003.

It was the blue-chip Dow average's best one-day percentage gain since 2003.

Even before the rate cut was announced, Lehman Brothers Holdings Inc LEH.N reported unexpectedly strong earnings that helped allay worries about the impact of credit market contraction on banks. Its shares jumped 10 percent to $64.49.

The biggest banking companies, whose profits usually benefit from a drop in short-term rates, were among top gainers. Shares of Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) rose about 5 percent.

"The Fed is clearly concerned about lending -- or the lack thereof in lending -- crimping economic activity and for now is willing to trade inflation for economic stability," said Tom Sowanick, chief investment officer of Clearbrook Financial LLC, in Princeton, New Jersey.

"The equity markets have responded accordingly," he added.

The Dow Jones industrial average .DJI shot up 335.97 points, or 2.51 percent, to end at 13,739.39. The Standard & Poor's 500 Index .SPX surged 43.13 points, or 2.92 percent, to finish at 1,519.78. The Nasdaq Composite Index .IXIC climbed 70.00 points, or 2.71 percent, to close at 2,651.66.

The New York Stock Exchange said it instituted upside trading curbs as stocks sharply extended gains after the Fed's decision.

SURPRISE, SURPRISE

The unexpectedly bold rate cut comes about a month after the central bank stepped in with a surprising cut in the discount rate to encourage banks to borrow directly from the central bank and ease the subprime credit crunch. On August 6, American Home Mortgage Investment Corp. AHM.N, one of the largest independent U.S. home loan providers, filed for Chapter 11 bankruptcy protection after rising customer defaults.

The benchmark federal funds rate now stands at 4.75 percent, its lowest level since May of last year. For details, see ID:nN18262031

The S&P index of financial shares .GSPF rose 4.5 percent. Bank profits benefit when there's a reduction in short-term interest rates, or their borrowing costs, and an increase in their long-term lending rates.

Citigroup's stock advanced 5.2 percent to $48.44, while JPMorgan's shares climbed 5.6 percent to $47.82, both on the

NYSE.