Stocks Shake Off Surprise Fed Move

Updated from 2:50 p.m. EDT

Stocks in New York were on the rise Tuesday afternoon on reports that woebegone insurer AIG (AIG Quote) may gain support from the Federal Reserve as it struggles to raise capital.

The Dow Jones Industrial Average was up 128 points at 11,045, and the S&P 500 was up 17 points to 1210. The Nasdaq was up 21 points to 2201.

The prospect of a loan package from the Fed for the ailing AIG, believed by some to be essential to the continued function of U.S. financial markets, helped buoy the indices. Citing a person familiar with the negotiations, Bloomberg reported that the central bank is looking to provide AIG with a loan package to support it as it faces a crippling liquidity crunch.

Separately, former AIG CEO Hank Greenberg looked to be attempting to take control of his former company. C.V. Starr, Greenberg's current company, said in a regulatory filing that it would pursue strategic options including a purchase of AIG's private assets, taking the company private, or initiating a proxy battle to buy it.

Earlier, the markets took a brief dive after the Fed's board of governors decided to keep its target interest rate at 2%. In a statement accompanying the decision, the Federal Open Market Committee said that economic growth has slowed and that it continues to monitor credit-market conditions.

After brokerage Lehman Brothers (LEH Quote) filed for bankruptcy protection on Monday, traders shifted their focus to AIG, whose balance sheet is crippled by its sale of insurance on subprime-related securities. Late Monday, the firm suffered a downgrade of its credit ratings by S&P, Moody's and Fitch.