Wall Street rallies for 2nd day after Fed rate cut

NEW YORK (Reuters) - Stocks rose on Wednesday as investors extended a rally a day after the Federal Reserve's bold rate cut, betting that lower borrowing costs would keep the economy from slowing further and boost profits.

Shares of mortgage finance companies, drug makers and manufacturers led the broad-based advance after the Fed cut the benchmark interest rate by a half-percentage point, the largest reduction in nearly five years.

Shares of Boeing Co (BA.N), a company that benefits from lower borrowing costs, gained 1.5 percent to $100.02, while the KBW Mortgage Finance index .MFX added 1.7 percent. The stock of Merck & Co. (MRK.N) rose 2 percent to $51.56 and ranked among the biggest advancers in both the Dow industrials and the

S&P 500.

"The cost of capital just went down. A cut in rates is good for investors. It's good for markets," said Weston Boone, vice president listed trading, Stifel Nicolaus Capital Markets, in Baltimore.

The regulator for Fannie Mae (FNM.N) and Freddie Mac (FRE.N) gave a lift to the beleaguered mortgage lending market after it unveiled new rules allowing the companies to buy more subprime home loans. Shares of Fannie and Freddie each rose more than 2 percent. For details, see.

Energy shares rose as oil prices hit a record on a report showing domestic crude supplies fell more than expected.

The Dow Jones industrial average .DJI was up 76.17 points, or 0.55 percent, to end at 13,815.56. The Standard & Poor's 500 Index .SPX was up 9.25 points, or 0.61 percent, at 1,529.03. The Nasdaq Composite Index .IXIC was up 14.82 points, or 0.56 percent, to close at 2,666.48.

Fannie Mae's shares were up 2.3 percent at $63.98 and Freddie Mac's stock gained 2.8 percent to $61.16.

However, Fed Chairman Ben Bernanke said in a letter that if the limit on the size of loans bought by Fannie Mae and Freddie Mac were to be raised, the move should only be temporary.

In late afternoon, the market pared some of its advance as investors took the chance to lock in profits, with diversified financial services companies reversing earlier gains. Stocks recorded their biggest percentage rise in four years on Tuesday, led in part by gains in financial companies.

Shares of Citigroup Inc. (C.N) dipped 0.4 percent to

$48.47.

Investment bank Morgan Stanley (MS.N) reported earnings that missed analysts' estimates. Its shares fell 2.2 percent to

$67.03.

Morgan Stanley was the second major investment bank this week to report earnings, coming on the heels of Lehman Brothers Holdings Inc LEH.N, which reported earnings that beat Wall Street's estimates on Tuesday. Bear Stearns Cos Inc BSC.N and Goldman Sachs (GS.N) round out the week of brokerage earnings on Thursday.

Oil prices surged to an intraday lifetime high over $82 a barrel, the sixth record in as many trading days. Shares of Schlumberger Ltd (SLB.N) rose 1.9 percent to $106.97.

Helping to ease some of the worries about inflation, the Labor Department data showed core inflation rose as expected last month and matched a rise in July.

Meanwhile, the Commerce Department said U.S. housing starts in August were at the slowest pace since June 1995. The Dow Jones U.S. Home Construction Index .DJUSHB ended down 0.6 percent after rallying at the start of the session.

Trading was moderate on the NYSE, with about 1.67 billion shares changing hands versus last year's estimated daily average of 1.84 billion.

On the Nasdaq, though, trading was fairly brisk, with volume of about 2.21 billion -- above last year's daily average of 2.02 billion.

Advancing stocks outnumbered declining ones by a ratio of about 2 to 1 on both the NYSE and the Nasdaq.