AP Photo/Richard DrewTrader Donato Vaccaro, second left, works on the floor of the New York Stock Exchange. Wall Street rebounded sharply Tuesday after the Federal Reserve and other central banks said they will pump $200 billion into the financial markets to help ease the strain from the credit crisis.
NEW YORK " Wall Street finally found a reason for a huge rally Tuesday, after the Federal Reserve said it plans to pump $200 billion into the financial markets to help ease the strain from the credit crisis.
The Dow Jones industrial average shot up more than 416 points, its biggest one-day point gain since July 24, 2002.
The Fed's program is part of a worldwide effort to help struggling banks and mortgage providers. The Fed " acting in concert with the European Central Bank, the Bank of Canada and the Swiss National Bank " agreed to loan investment banks money in exchange for debt, including slumping mortgage-backed securities.
The move is meant to essentially create a market for assets that investors have been too scared to buy. That freeze-up in demand had sent asset values plunging and caused huge losses for some of the world's biggest banks.
The decision by the Fed arrives after a series of hefty losses in stocks, noted Anthony Conroy, managing director and head trader for BNY ConvergEx Group.
That, along with the unwinding of bets that the market would fall further, may have exaggerated the stock market's rebound.
But the market is hopeful the central banks' decision Tuesday might be more effective than previous moves " like rate cuts, which had elicited initial stock pops but then eventual skepticism about whether they would be enough to keep the economy out of a recession.
"It's not just a rate cut. I think it's a very creative way to do financing," Conroy said. "It shows the Fed is willing to do things that are a little out-of-the-box to shore up credit issues. I really think they went to the heart of the issue."
The latest step was seen as a direct lifeline to investment banks, which previously couldn't borrow in past Fed liquidity plans.
"The big problem has been the financials, and this helps supply money directly to the banks and may take some of the need for aggressive rate cutting off the table," said Peter Dunay, chief investment strategist at Meridian Equity Partners. "The Fed is basically going to take the bad loans off the banks' books, and the market seems to be loving that idea."
The central bank may have avoided dramatically slashing interest rates again when it meets next week. Economists remain concerned about the unrelenting rise in oil prices and the dollar's weakness, which contribute to inflation " and cutting rates only add to these pressures.
According to preliminary calculations, the Dow rose 416.66, or 3.55 percent, to 12,156.81. The index " which lost more than 500 points in the last three sessions " is still down about 2,000 points from its October 2007 record high.
Broader stock indicators also soared. The Standard & Poor's 500 index rose 47.28, or 3.71 percent, to 1,320.65, while the Nasdaq composite index surged 86.42, or 3.98 percent, to 2,255.76.