Fed discount rate cut propels futures higher

NEW YORK, Aug 17 (Reuters) US stock index futures surged on Friday after the Federal Reserve unexpectedly cut the discount rate by half a percentage point to 5.75 percent in a move to keep credit flowing and calm jittery markets.

Shares of mortgage-related companies, which have borne the brunt of recent market turmoil, were some of the biggest gainers in electronic trading before the open.

The Financial Select Sector SPDR Fund, an exchange-traded fund of banking stocks, rose 5.9 percent.

Countrywide Financial Corp, the largest U.S. mortgage lender, shot up 17.4 percent to .25. Investment bank Bear Stearns Cos. jumped 4.8 percent to 2.

The Fed cut the rate that it charges member banks for loans. The Fed said it cut the rate as the downside risks to growth have increased ''appreciably.'' The action could lower the cost of capital for banks and help counteract the growing reluctance among lenders to make loans.

The resulting credit squeeze helped to send stock markets around the world into a tailspin in recent days.

The federal funds rate, the central bank's main monetary policy mechanism, was left unchanged at 5.25 percent.

''This is an unusual move in unusual times,'' said Robert MacIntosh, chief economist at Eaton Vance Corp. in Boston. ''I'm pleased they did not change the fed funds rate. It shows they are still serious about fighting inflation. Stocks will like it, bonds will like it.'' Stocks futures were sharply negative before the Fed's announcement but surged after the news. S&P 500 futures were up 31.8 points, well above fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures climbed 211 points, and Nasdaq 100 futures gained 34.5 points.

REUTERS SRS DB1904