NEW YORK — The stock market posted some healthy gains Tuesday as a sudden decline in a key lending rate triggered a late burst of buying.
Analysts said the rate decline stirred speculation that Federal Reserve policy-makers, starting a private two-day meeting, had decided to relax the central bank's credit policy, something that could benefit stock prices.
But some market watchers said the decline in the federal funds rate to below 6% was probably an aberration.
The Dow Jones index of 30 industrials, which fell 14.76 on Monday, finished up 18.74 at 1,914.46. The advance broke a string of four straight declines in the market's best known average.
Interest Rate Questions
Advancing issues led losers by a margin of nearly 2 to 1 among stocks listed on the New York Stock Exchange.
Volume on the Big Board came to 162.35 million shares, compared to 168.85 million on Monday.
The market traded in a narrow range most of the session as traders were said to be awaiting the December trade deficit figures, due to be released Friday.
While many analysts expect an improvement in the trade figures, an increase in the deficit could spark concerns that the dollar must fall further to reduce the imbalance, discouraging foreign investment in the U.S. markets.
Another uncertainty centers on if and how the Federal Reserve will decide to guide interest rates lower amid signs that the economy is slowing.
The Federal Open Market Committee, the policy-making arm of the Fed, met Tuesday and will meet again today. Analysts believe that the Fed must decide how to let interest rates ease without undoing the work done to stabilize the dollar. Lowering the discount rate might be too radical a move, given the precarious dollar.
Traders also were looking for clues about results from the Fed's private policy-making session, which comes amid concerns that the economy may be headed into a recession.
In the final hour of trading, the federal funds rate, the interest that banks charge each other for short-term loans often needed to meet the central bank's reserve requirements, fell below 6%.
Newton Zinder, a veteran market watcher for Shearson Lehman Hutton, said the decline triggered late buying because it "created some speculation that the Fed may have eased a bit."
He said he considered it "too early to say if that has actually happened" and noted that some analysts who follow the money markets "say it is a fluke."
But he added: "The market has been grasping for good news, and when they saw this they pounced on it as an occasion for some buying."
He said an undetermined amount of the buying came from speculators who use computers to take advantage of discrepancies between the prices of stocks and those of stock index futures.
Those comparisons called late Tuesday for selling the futures contracts and buying the underlying stocks, he said.
Stronger earnings by General Motors also helped investors shrug off worries over a recession and to focus on declines in interest rates and the steadiness of the dollar. GM drove ahead 1 5/8 to 62 7/8, with fourth-quarter profit more than doubling and surpassing estimates.
Traders also said the market's technical strength was recharged when the Dow index managed to stabilize near 1,900 after an early morning rally ran out of steam.
But they said many investors, despite the late rally, are apathetic about buying.
"Portfolio managers are answering their own phones," said Hugh Johnson, of First Albany Co. "Before in the bull market, they'd have 15 calls backed up."
Government reports on January retail sales and December's trade deficit, due respectively on Thursday and Friday, are reinforcing investors' cautiousness.
British Stocks Rebound
Trading volume was swelled by activity in stocks involved in takeover speculation and those with deadlines approaching for dividend payments.
Leading the most-active list were three such stocks--Consolidated Edison rose to 45 5/8, Avon Products fell to 23 3/4 and Panhandle Eastern fell 3/8 to 25.
Shares of Federated Department Stores dropped 1 to 57 7/8 after the head of the Canadian concern seeking to buy Federated said he would not pay more than $61 a share. "No, it would be too expensive," Robert Campeau told reporters in Toronto.
In London, stock prices bounced back Tuesday from Monday's sharp decline. The Financial Times 100-share index was up 12.7 points to 1,707.2 at the close.
On the Tokyo Stock Exchange, the Nikkei 225-share index closed at 23,662.27, down 109.33 points.