U.S. Stocks End Volatile Day With Mixed Results

Ader of RBS Greenwich said that in addition to removing some of the agency paper from the market, the Fed's move also has a psychological impact by removing blockage in the credit markets. "This may open up the way for other people to say 'they're involved in this stuff; I'm going to buy mortgages too.'" He said that although flooding the market with money runs a longer-term risk of inflation, "This is a crisis we need to deal with."

"The growth of mortgage credit has literally collapsed," said Bethune of Global Insight, as mortgage lenders have been hesitant to originate loans because the prices of homes continue to fall. In addition, he said, Fannie and Freddie themselves reduced the amount of credit they were generating as they ran into capital constraints earlier this year. "It really is a very difficult situation," he said.

The Fed also announced the creation of a $200 billion facility for holders of triple-A rated asset-backed securities tied to loans related to education, autos, credit cards and small businesses.

Speaking at a press conference about the Fed programs and the $700 billion Troubled Asset Relief Program, Treasury Secretary Henry Paulson said that stabilization of the mortgage-backed securities market and stimulation of consumer-lending markets are crucial. He said that Americans need to continue to be able to finance everyday purchases and stressed that no single piece of legislation was likely to resolve the credit crisis.

An early rally on the news of government assistance quickly gave rise to profit-taking, however, as investors remained skittish about the financial crisis' continued impact on the economy.