Stocks make great leap forward
Wall Street - which has been in a downward spiral and searching for a catalyst to reverse a doom-and-gloom mentality caused by the housing and mortgage bust - enjoyed a huge relief rally on fresh signs the Fed will do what is needed to ensure that banks have enough cash on hand to keep lending.
The Dow Jones industrials soared 417 points - the fourth-best point gain ever - to 12,157. The Dow's 3.5 percent jump was its biggest since March 17, 2003.
"What a surge!" says Andy Brooks, trader at money manager T. Rowe Price. The rally, he says, illustrates the upside potential of stocks when dysfunctional credit markets return to normal.
In an effort to "promote liquidity," the nation's central bank said it will swap up to $200 billion of ultra-safe Treasury securities for a range of currently less desirable products, including mortgage-backed securities.
The targeted approach was applauded by investors. "It's like localized chemotherapy that attacks only the tumor," says Doug Roberts, chief investment strategist at Channel Capital Research.
The Fed hopes the plan will make it easier for lenders that do the swaps to raise cash by using Treasuries as collateral. Banks can borrow the Treasuries for 28 days, rather than overnight.
The move is the latest in a series of aggressive Fed efforts since last summer seeking to calm financial markets and stabilize the economy. Despite the central bank's earlier moves - including lower-cost loans, steep interest rate cuts and special funding auctions - credit markets have continued to tighten, and the economy has veered toward recession.
The Fed's new plan to target liquidity more surgically has other potentially bullish implications for Wall Street. "It is not as inflationary as interest rate cuts and to some extent substitutes for cuts," notes Don Luskin, chief investment officer at Trend Macrolytics. "This could take much of the wind out of the sails of gold, oil and other commodities," he says, and help boost the dollar against foreign currencies.
Wall Street is still debating whether gains will stick. Stocks haven't reacted well to earlier Fed cuts or other central bank interventions to help the credit crunch. The Dow is down 9.3 percent since Sept. 18, 2007, the day before the Fed's first rate cut. In that period, the Fed lowered its benchmark short-term interest rate to 3 percent from 5.25 percent.
"The Fed is allowing things to get moving and greasing the wheels a bit; and hopefully it is enough oil," says Paul Hickey of Bespoke Investment Group.
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