Stocks, dollar surge on US interest rate cut hopes

Following Fed official's remarks, Dow, Asian stocks rally, but housing woes continue for America's poor.

Stock markets rallied Wednesday after comments by the No. 2 official at the Federal Reserve hinted at another interest-rate cut.

In a speech to the Council on Foreign Relations in New York, Fed Vice Chairman Donald Kohn said economic uncertainties caused by jitters in the credit market may warrant "flexible and pragmatic policymaking."

"The increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October," he continued. "And should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses."

Kohn's remarks were widely interpreted as a signal that the Fed's Open Market Committee would lower short-term interest rates at its Dec. 11 meeting; these would be the third set of rate cuts in as many months.

Following Kohn's remarks, the Dow Jones Industrial Average rose 331.01 points, or 2.6 percent, to 13,289.45 amid heavy trading. This followed Tuesday's 215-point jump and completed the largest two-day gain in five years. The S&P 500 rose 2.9 percent, and the Nasdaq 3.2 percent. Asian stocks followed suit Thursday, with Hong Kong's Hang Seng index gaining 4.1 percent, the Shanghai Composite Index 4.2 percent, and Tokyo's Nikkei index climbing 2.4 percent – the latter a two-week high. Markets in Australia, Singapore, South Korea, Taiwan, and the Philippines also rose.

The US dollar also made gains against the yen, the euro, and the British pound.

But the stock gains came amid gloomy economic data for October. Reuters reports that almost 225,000 mortgage foreclosure filings were reported last month – a 94 percent increase over October 2006. Some economists predict that the numbers will worsen next year, as another 2 million homeowners can expect to see their adjustable-rate mortgages reset higher.

CNNMoney reports that sales of existing homes hit their lowest total since at least 1999, and are down more than 20 percent from a year earlier. At the same time, housing prices have experienced the biggest drop since 1970.

Sales of durable goods also were weaker than expected. According to Forbes, the Commerce Department reported that orders for durable goods dropped 0.4 percent in October.

New York Times commentators see the Fed's rate cuts as a response to a bleak economic picture, noting that as Wall Street continues to reel from the subprime mortgage fallout, banks are increasingly reluctant to offer new loans.

"Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession," writes the Times's Peter Goodman. "Already, companies in everything from furniture manufacturing to Website design are tightening their belts, delaying expansion, and scrambling for other sources of cash."

The Motley Fool's David Stevenson shares this pessimism. Citing slow economic growth and high interbank lending rates, he predicts that Wednesday's market spikes will soon cool.

[W]hilst there may be periods of optimism as rate cut hopes resurface, soaring food and oil prices mean that central banks have little room for maneuver if they wish to keep inflation under the thumb.

And I believe that plenty of bad news in the pipeline, both within and outside the financial sector, will drive US and [British] share prices back down again.