Wall Street surged higher Wednesday after the Federal Reserve, confirming that there is increasing stress on the economy, cut interest rates half a percentage point and indicated that more rate reductions are possible. The Dow Jones industrials rose more than 120 points.

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Wall Street surged higher Wednesday after the Federal Reserve, confirming that there is increasing stress on the economy, cut interest rates half a percentage point and indicated that more rate reductions are possible. The Dow Jones industrials rose more than 120 points.

The Fed’s statement accompanying its decision to lower both the target fed funds rate and the discount rate reiterated the central bank’s concern about the weakening economy. The Fed’s moves left the fed funds rate at 3 percent, its lowest level since the spring of 2005.

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the Fed said. “Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.”

Most investors had expected a half-point cut. Perhaps most important was what many investors regarded as the central bank’s assurances that it was willing to take further action to support a flagging economy.

“The worst thing that can happen is for credit to dry up in the U.S. economy, and they know that,” said Scott Wren, equity strategist for A.G. Edwards & Sons.

The market was clearly enthused by the rate cut, and also at the fact that the Fed’s statement offered no big surprises. But key reports on the job market and manufacturing set to arrive Friday could reignite investors’ concerns about the state of the economy.

“You need this and some good news _ like the durable goods number that we saw earlier this week _ that the economy’s not going to be as bad as people think,” Wren said.

On Tuesday, the Commerce Department said orders for big-ticket items rose 5.2 percent in December, the widest jump in five months.

In the final hour of trading Wednesday, the Dow rose 128.28, or 1.03 percent, to 12,608.58, after rising 273 over Monday and Tuesday.

Broader stock indicators also advanced. The Standard & Poor’s 500 index rose 14.49, or 1.06 percent, to 1,376.79, while the Nasdaq composite index advanced 26.69, or 1.13 percent, to 2,384.75.

Government bond prices fell after the Fed’s decision, sending yields higher. The yield on the 10-year benchmark note rose to 3.74 percent from 3.68 percent late Tuesday.

The fed funds rate is the interest banks pay one another on overnight loans. The discount rate, which now stands at 3.50 percent, is the interest the Fed charges on loans to banks.

“We met expectations, and there’s some relief,” said Bruce McCain, head of the investment strategy team for Key Private Bank. And because recent statistics have pointed to very slow growth but not necessarily recession, he said, there’s opportunity for the rally to continue, particularly if sentiment stays optimistic.

“That’s what the Fed was trying to do: to stabilize public confidence in part so consumers and businesses continue to spend.”

The Fed’s decision follows an emergency rate cut last week of three-quarters of a percentage point. The central bank stepped in at the time after global markets worldwide fell sharply amid fears that the U.S. economy was tipping into recession and would hurt the global growth. The move was the biggest one-day move in more than 20 years.

The rate cuts came on the same day as fresh evidence arrived that the economy had slowed significantly in the final three months of 2007. Figures showed gross domestic product expanded at a slight 0.6 percent pace in the fourth quarter, less than half what had been expected. For all of 2007, gross domestic product grew 2.2 percent, the weakest rate since 2002.

“The economy has been weakening significantly, and the GDP number gives the Fed a reason to cut aggressively,” said Thomas J. Lee, chief U.S. equities analyst at JPMorgan.

Wednesday’s move was the fifth cut the Fed made since it began making reductions in September following turmoil in the credit markets and in stocks markets.

“The consumer is essentially under enormous pressure,” Lee said, noting that even if the fiscal stimulus proposed by the Bush administration is passed Feb. 15 by Congress, it is going to take some time to get into the hands of consumers.

The subprime mortgage crisis has been creating problems for homeowners and financial institutions alike.

Swiss bank UBS said it will have a $11.4 billion fourth-quarter loss mostly because of bad investments in subprime mortgages. Analysts had expected a much smaller shortfall. French bank BNP Paris Wednesday said its quarterly profit will decline by 40 percent from year-earlier levels.

Meanwhile, Yahoo Inc. took a thumping Wednesday after the Internet search company said its quarterly profit declined, its 2008 sales outlook was below analysts’ forecasts, and that it was slashing 1,000 jobs.

Yahoo Inc. fell $1.80, or 8.7 percent, to $19.01.

The biggest loser among the 30 Dow components Wednesday was Merck & Co., which late Tuesday reported a $1.63 billion fourth-quarter loss in the fourth quarter due mostly to charges for its Vioxx litigation settlement.

Merck fell $1.60, or 3.3 percent, to $46.41.

Overseas markets fell ahead of the U.S. rate decision. In Tokyo, the Nikkei fell 0.99 percent. In Europe, London’s FTSE 100 dropped 0.81 percent, Paris’ CAC 40 lost 1.37 percent and Frankfurt’s DAX fell 0.26 percent.

Crude oil rose 69 cents to settle at $92.33 a barrel on the New York Mercantile Exchange.

The dollar was mixed against other currencies, while gold prices dipped.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.28 billion shares.

The Russell 2000 index of smaller companies rose 5.66, or 0.80 percent, at 710.86.

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