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Stocks soar on hopes for cut

Ben Bernanke doesn't address interest rates, but traders see signs.

NEW YORK - Wall Street rose sharply Tuesday as investors grew more confident that the Federal Reserve will lower interest rates next week, even after its chairman, Ben Bernanke, gave no clues about the central bank's intentions. The Dow Jones industrials rose 180 points.

Traders had been hoping Bernanke would give some indication during a speech to Germany's Bundesbank about the Fed's next move. Wall Street is looking for a rate cut to help bolster the U.S. economy and ease problems caused by tightening credit availability.

Instead, Bernanke said the United States and other countries must work together to right a skewed pattern of trade and investment around the globe, a move that would help worldwide economic stability.

So-called "global imbalances" occur when countries such as the United States run up bloated trade deficits, while other countries, such as China and oil-producing nations, produce big trade surpluses. The International Monetary Fund has been leading efforts over the years to reduce lopsided trade and investment patterns.

As for prospects of fixing the problem, Bernanke said, "Signs of progress have appeared but ... most countries have only just begun to undertake the policy changes that will ultimately be needed."

"Bernanke didn't really say anything about interest rates, but at this point the feeling on Wall Street is that it's mandatory," said Steven Goldman, chief market strategist, Weeden & Co., speaking about a rate cut. "At this point, the market is pricing in not just one rate cut, but a couple, and that's helping to stabilize stocks."

The stock market has been volatile since midsummer, with jitters high about the sluggish housing market and debt aversion causing a standstill in the credit markets and damaging the economy. Mark Zandi, chief economist at Moody's Economy.com, predicted the risk of a recession in the next six to 12 months has increased to nearly 40 percent from less than 15 percent before subprime concerns began riling the markets.

The Dow rose 180.54, or 1.38 percent, to 13,308.39. The Standard & Poor's 500 index rose 19.79, or 1.36 percent, to 1,471.49, while the Nasdaq composite index rose 38.36, or 1.50 percent, to 2,597.47.

Tim Krause, director of risk management at California-based Zecco Trading, agreed that Tuesday's rally was due to institutional investors being optimistic about a rate cut. However, he's not entirely convinced the Fed will cut rates, given that it will impact an already weakened dollar - which is now near a record low vs. the euro.

"The Fed is between a rock and a hard place," he said. "If they lower interest rates, the dollar will keep getting crushed. If they don't, the subprime mess will get worse and hurt the housing market."

The Dow benefited from strong gains in McDonald's Corp. shares, which rose 3.2 percent.

[Last modified September 12, 2007, 00:40:55]