NEW YORK — Stocks soared in early morning trading, propelling the Dow Jones industrials up more than 300 points after the Federal Reserve, acknowledging that the stock market's plunge posed a threat to the economy, slashed its discount rate by a half percentage point.
The central bank's step — a move Wall Street was angling for — gave the market a boost after weeks of losses fueled by turmoil in the credit markets.
The Fed has poured billions in additional liquidity into the banking system in recent days, but Friday's rate cut marked its most dramatic effort yet to alleviate fears about tightening credit and calm the global financial markets.
The Fed cut the discount rate to 5.75 percent from 6.25 percent, declaring that "downside risks" to the economy have increased appreciably.
However, the central bank did not change its target for the federal funds rate, which has remained at 5.25 percent for more than a year. Many strategists believes the market won't settle down until the Fed lowers the fed funds rate — the rate banks charge each other on overnight loans. The discount rate only covers loans the Fed makes to banks.
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It was too early to tell how much of the buying was a relief rally after weeks of losses, and whether the gains would stick. The market has quickly given back any advances it has scored in recent weeks amid growing signs of problems in the credit markets.
For investors, the question is whether the discount rate cut is a signal that the Fed is seriously leaning toward cutting the fed funds rate, considered a more important benchmark, at its next meeting on Sept. 18.
In the first hour of trading, the Dow Jones industrial average surged 315.56, or 2.46 percent, to 13,161.34.
The Standard & Poor's 500 index rose 37.00, or 2.62 percent, to 1,448.27, and the Nasdaq composite index rose 73.89, or 3.01 percent, to 2,524.96.
Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.70 percent from 4.66 percent late Thursday.
Gains were seen in all sectors of the stock market, but battered financial stocks, hurt by growing problems in mortgage lending, saw the most buying. All of the 30 Dow companies rose in early trading, with Citigroup Inc. and JPMorgan Chase & Co. posting the biggest increases.
Major European indexes recovered substantially after the Fed's announcement from steep declines in earlier trading. Britain's FTSE 100 rose 3.43 percent, Germany's DAX index rose 2.82 percent, and France's CAC-40 rose 3.13 percent.
In Asian trading, which closed before the Fed lowered the discount rate, Japan's Nikkei stock average plunged to close down 5.42 percent as the yen continued its climb against the dollar. The dollar briefly dipped below 112 yen for the first time in over a year, suggesting some investors may be taking their Japanese currency out of higher-yielding dollar assets.