Dow Soars More Than 400 Points

Updated from 4:04 p.m. EDT

Stocks in the U.S. staged a mammoth rally Tuesday after the Federal Reserve's latest attempt to stabilize the markets brought in droves of buyers and forced traders who were heavily short to run for cover.

The Dow Jones Industrial Average bolted up 416.66 points, or 3.6%, to 12,156.81, and the S&P 500 jumped 47.28 points, or 3.7%, to 1320.65. The Nasdaq climbed 86.42 points, or 4%, at 2255.76.

Breadth was positive. Some 5.25 billion shares changed hands on the New York Stock Exchange, with advancers outpacing decliners by a 4-to-1 margin. Volume on the Nasdaq reached 2.5 billion shares as winners beat losers 7 to 3.

The major indices have been taking such huge hits in recent months that all three are still down substantially for the year -- the Dow by 8.3%, the S&P by 10.1%, and the Nasdaq by 14.9%. But, for the month thus far, all three indices have pared back their losses to under 1% apiece.

Equity measures climbed after the central bank said it was putting another $200 billion of liquidity into the markets through an arrangement that will lend Treasuries to primary dealers in exchange for mortgage-related paper.

The new Term Securities Lending Facility will provide 28-day loans in exchange for collateral including debt and residential-mortgage-backed securities from government-sponsored entities Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote), along with nonagency highly rated private-label residential mortgage-backed securities.

Additionally, the Federal Open Market Committee, the policymaking arm of the Fed, has authorized an increase in its existing currency swaps with the European Central Bank and the Swiss National Bank.

James Glassman, senior economist with JPMorgan Chase, said it was the first creative thing he has seen the Fed do since the advent of the credit crunch. "It provides a little more of a calming backdrop, and it takes pressure off those institutions," Glassman said. He also pointed to the deal's psychologically important global reach, given the Fed's collaboration with some of its foreign counterparts.

Brandon Thomas, chief investment officer with Portfolio Management Consultants, the investment arm of Envestnet Asset Management, noted that the market has become accustomed to rate cuts from the Fed, whereas this latest action is a far more targeted tool, allowing banks to borrow against illiquid issues such as mortgage-backed securities for longer periods of time.

"It's not going to be a panacea for all the ills in the economy, but it will get liquidity coursing through the system," he said. "Rate cuts can do that, but that's a much blunter instrument that the banks may or may not take advantage of, depending on whether they choose to lend more money."

The central bank's move comes on the heels of its decision last week to inject an added $140 billion in short-term credit and to take on difficult-to-sell asset-backed paper as collateral.

Since the credit crisis began in earnest last summer, the Fed has taken steps to help the banking arena regain its footing, including cutting its overnight lending rate, the fed funds target rate, by 225 basis points to 3%. However, many traders have felt Chairman Ben Bernanke and his lieutenants haven't been aggressive enough in mitigating the turmoil.

Glassman, for his part, said, "I don't really think the rate decision the Fed makes is really that critical anymore," referring to the Fed's next meeting on March 18, which is expected to result in an easing of as much as three-quarters of a point.

Futures are now pricing in only a 76% chance that the Fed will cut rates by 75 basis points, down from 100% odds on Monday.

"Figuring out how to crack through the barrier of fear is the main thing," Glassman said. "The markets are highly illiquid, and these kinds of actions are more of what's needed."