Wall Street celebrated its best one-day performance in more than four years as investors reacted with jubilation to a surprise Federal Reserve decision to cut interest rates by 50 basis points.

The unanimous vote to cut the federal funds rate from 5.25 per cent to 4.75 per cent was rapturously received after sentiment had appeared to signal a cut of only 25bp.

The Federal Reserve also cut the discount rate – the rate at which banks can borrow directly from the Fed – by 50bp to 5.25 per cent.

The S&P 500 soared through 1,500 points, closing 2.9 per cent higher at 1,519.78, its best day since March 2003.

Stocks particularly exp-osed to turmoil in credit markets had dramatic gains. The S&P financials index closed 4.5 per cent higher while the investment bank index climbed 5.9 per cent.

Moody’s, the credit rating agency, soared 10.1 per cent to $47.20 while McGraw-Hill, owner of Standard & Poors, put on 9 per cent to $52.10.

The Dow gained 2.5 per cent on the day to 13739.39 while the Nasdaq Composite index closed 2.7 per cent higher at 2651.66

“It was a positive surprise for markets,” said Jack Caffrey, equity strategist at JPMorgan Private Bank. ”The reaction from investors shows they think the fed has made a strong statement.”

However, the Fed decision rekindled concerns about inflationary pressures which had earlier been temporarily soothed by new producer price data.

Producer prices tumbled 1.4 per cent in August after a 0.6 per cent rise in July and more than the expected 0.3 per cent decline. Lower energy prices last month sparked the fall in headline PPI, said economists.

The core PPI, which excludes food and energy, rose 0.2 per cent last month, following a climb of 0.1 per cent in July. For the past year, both the headline and core rates rose 2.2 per cent.

The data helped pushed stock prices higher, but investors tend to focus on consumer prices – due on Wednesday – as a better guide for inflation.

US crude closed at a record high of $81.51 a barrel, providing renewed support to energy stocks.

In after-hours trading, crude surged through the $82 mark as traders bet that the Fed decision would give a boost to economic growth and raise demand for oil.

The S&P 500 homebuilders index also rallied, closing 4.5 per cent higher, as traders bet the interest rate cut could provide a fillip to the distressed mortgage market.

The sector had struggled earlier after the National Association of Home Builders housing market index fell to equal its all-time low of 20 points, a level last reached in January 1991.

However, the S&P homebuilders index is still trading around 60 per cent below its peak in July 2005, and remains at levels last seen in 2003.

Financials were the surprise of the day as better than expected earnings from Lehman Brothers galvanised the sector.

Lehman announced a 3.2 per cent fall in earnings compared with the same quarter a year ago. But the decline was less than analysts had expected and the stock closed 10 per cent higher at $64.49

It was Lehman’s first quarterly decline since 2002, and came as mortgage and leveraged loan positions were written down.

The brokerage’s fixed income revenues for the quarter fell 47 per cent to $1.1bn from $2bn the prior year. Lehman said “substantial valuation reductions” led to a net reduction in revenue of $700m.

“Investment banking revenues, particularly advisory fees, were stronger than we anticipated,” said Matthew Albrecht, brokerage analyst at Standard & Poor’s Equity Research.

Lehman was kicking off this week’s fiscal third-quarter earnings results with results from Morgan Stanley due on Wednesday and Goldman Sachs and Bear Stearns on Thursday.

Technology stocks were also in focus after Adobe increased net income for the three months ending August 31 by 117 per cent compared with the same quarter last year. Adobe ended the day 1.5 per cent higher at $43.71 at midday.

Best Buy, the consumer-electronics retailer, was also higher after it posted a 8.7 per cent rise in second quarter profits and raised its guidance for the full year. The shares gained 6.5 per cent to $47.46.

E*Trade Financial, the online brokerage, fell as low as $13.24 after cutting its earnings forecast for the year by 31 per cent, but even its shares rebounded, closing down 1.5 per cent at $14.

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