msnbc.com news services
updated 6/30/2006 7:54:33 AM ET 2006-06-30T11:54:33

A relief rally carried Wall Street sharply higher Thursday, pushing the Dow Jones industrial average up 217 points, after the Federal Reserve said it would consider the health of the overall economy as well as the direction of inflation as it formulates its interest rate policy.

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Investors were reassured by the Fed’s statement accompanying an expected quarter-point hike in short-term lending rates . In it, the Fed noted that economic growth has moderated but that “some inflation risks remain.” But the central bank, which has tended to focus on inflation in past statements, said it would look at both the economy’s growth rate and the impact of inflation in deciding whether to raise rates in the future.

“They left the door open that they might pause. That’s what it’s all about,” said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida. “It’s worth noting typically the first move after one of these statements is usually a false move by the stock market, but for now, the market is reading it like a pause.”

That language consoled a market worried that Chairman Ben Bernanke might raise rates so high in his fight against inflation that the economy would suffer. Thursday’s rate hike to 5.25 percent was a foregone conclusion on Wall Street, and many traders are expecting another quarter-point increase when the Fed’s Open Market Committee next meets in August.

Stocks have endured weeks of wildly erratic trading while the interest rate outlook remained cloudy, particularly after Bernanke warned earlier this month that the Fed remained concerned that high energy prices could accelerate inflation.

Rate-sensitive stocks, like banks, were some of the top gainers on Wall Street Thursday. Shares of Citigroup and JPMorgan Chase helped bolster both the Dow Jones industrial average and the broader Standard & Poor’s 500-stock index.

The technology-loaded Nasdaq composite index was the day’s strongest gainer, rallying 62.54 points, or 2.96 percent, and registering its biggest percentage gain since March 2004.

The Dow Jones industrial average surged 217.24 points, or 1.98 percent, chalking up its biggest percentage gain since April 2005. All 30 components of the Dow ended higher. The broader Standard & Poor’s 500-stock index jumped 26.87 points, or 2.16 percent, to its biggest gain since October 2003. The rally drove the S&P 500 back into positive territory for the year.

Bonds rose further on the Fed’s statement, with the yield on the 10-year Treasury note tapering to 5.2 percent from 5.25 percent late Wednesday. The 2-year yield dropped to 5.2 percent, a signal of heightened investor confidence in holding long-term debt.

The Fed’s announcement enabled Wall Street to look past a rise in crude oil prices . Energy traders snapped up crude futures on a report showing shrinking U.S. gasoline reserves amid the start of the busy summer driving season.

Government reports issued hours before the Fed meeting pointed to an economy that isn’t overheating. The Commerce Department raised first-quarter gross domestic product growth to a 5.6 percent annual rate but cut the GDP’s inflation measure to 3.1 percent, feeding optimism that price increases may be under control.

A slight rise in jobless claims also bolstered hopes that a gradual weakening of the job market will be mirrored by the economy. First-time unemployment applications rose 4,000 to 313,000 last week, the Labor Department said.

In corporate news, cereal and snack-food maker General Mills Inc. posted a 52 percent drop in quarterly profit — matching Wall Street estimates — after the sale some of its businesses inflated year-ago results. General Mills rose 15 cents to $51.61.

Ford Motor Co. added to the auto industry’s woes after The Wall Street Journal quoted Chairman and Chief Executive Bill Ford as saying the automaker was facing worse-than-expected sales declines amid high gasoline prices. Ford shares fell 8 cents to $6.28.

Merrill Lynch upgraded Dow component McDonald’s Corp. to “buy,” citing forecasts for improved sales and margins. McDonald’s gained $1.59 to $33.56.

In overseas trading well before the Fed’s announcement, Japan’s Nikkei stock average surged 1.58 percent. Britain’s FTSE 100 climbed 1.99 percent, Germany’s DAX index added 2.29 percent and France’s CAC-40 was higher by 2.23 percent.

The Associated Press and Reuters contributed to this report.

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