Updated from 4:08 p.m. EST

Wall Street rallied sharply Tuesday after the Federal Reserve, in an unexpected move, established a range for its federal fund rate of 0% to 0.25%. The move was more aggressive than the half-point cut, to 0.5%, that analysts had expected.

The Dow Jones Industrial Average surged 359.61 points, or 4.2%, to 8924.14, and the S&P 500 gained 44.61 points, or 5.1%, to 913.18. The Nasdaq climbed 81.55 points, or 5.4%, to 1589.89.

In its announcement Tuesday afternoon, the Federal Open Market Committee said that as previously announced the Fed will purchase "large quantities" of agency debt and mortgage-backed securities. The central bank is also evaluating the potential benefit of buying longer-term securities.

"Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further," said the FOMC.

Going forward, the Fed said its policy will focus on supporting the functioning of financial markets and stimulating the economy through open market operations and other measures that sustain the size of its balance sheet.

"Clearly, it surprised the market by lowering the rate more than expected, but they're also really throwing all of their arsenal in," says Jack Ablin, chief investment officer at Harris Private Bank, of the Fed's move. "It hasn't dug its heels in with the single dimension of rate rising and cutting -- it's moved past that.

"It's good news," he says, "the Fed understands the situation and has the flexibility to do a variety of things to combat it."

The FOMC said it anticipates exceptionally low levels of the federal funds rate for some time. "By doing this, they were able to get long-term bond yields down by about 15 basis points, so effectively, they've dropped borrowing costs right across the yield curve," says Brian Bethune, chief U.S. financial economist at IHS Global Insight.

"Economic indicators, even the ones we've thought were not looking too good have proven to be weaker yet," says Bethune. "Clearly there needs to be a very aggressive policy response, and this is the way to go."

Earlier in the day, the government announced new home construction and building permit applications fell for the fifth consecutive month in November -- slightly more so than consensus expectations.

In the coming months, housing starts and existing-home sales will remain key numbers for the market as it tries to get a sense of where (and how close) the bottom is in housing, says Paul Nolte, director of investments at Hinsdale Associates. "Housing was the lead into the economic slowdown and many are looking at it as a lead out."

The most widely cited inflation indicator, the Consumer Price Index, a measure of the price level of a fixed market basket of goods and services purchased by consumers, also declined more than expected. Excluding food and energy, the "core rate" of inflation was 0 for November. CPI is used to calculate cost of living adjustments (COLA) for government programs and private labor agreements.

Economists are expecting another decline in December, bringing the CPI down to zero, says Bethune, so prices will go to an outright decline in 2009.

"It creates a lot of pressure in the sense that if you're a producer and product prices decline, you're going to scramble to cut production," says Bethune. "You certainly don't want any inventory sitting around, because the valuations are going to decline." In the automotive and computer industries, for instance, this would exacerbate downward pressure on production in the short term.

"It's very troubling in terms of the short-term outlook," he says, "but, of course, the positive benefits are it reduces inflation expectations, and brings interest rates down -- in some respects, it's a bit of a Christmas gift for the consumer." Lower fuel costs, especially, should help give the consumer a little more wriggle room for discretionary spending and ideally will bring down consumer borrowing costs, he says.

Goldman Sachs ( GS) announced its first quarterly loss as a public company early Tuesday. The company reported a loss of $2.12 billion, or $4.97 a share, while Wall Street analysts had predicted a loss of $3.73 a share. Shares garnered 14.4% by the session's end, increasing their value to $76.

In other earnings news, Best Buy ( BBY) reported a 77% decline in third-quarter profit and announced a plan to cut capital spending by 50% in 2009. Shares rose nearly 18% to $27.68.

Biotech Select

In analyst actions, Goldman upgraded Baidu ( BIDU) to its Conviction Buy list, sending shares of the China-based Internet company up 11.8% to $132 in Tuesday trading.

Meanwhile, there remained no new word about the progress of temporary help for the U.S. auto industry, while Chrysler and General Motors ( GM) have said they may have only weeks of sustainability left.

Something will be done, although how much is done and to what it extent it gets the automakers where they need to be is still an unknown, says Hinsdale's Nolte. While early last week it seemed resolution was at hand, it's now clear that it's still very much a debate.

The White House has said it might now be willing to use money drawn from the $700 billion Wall Street bailout, known as the Troubled Asset Relief Program (TARP). The Treasury also said it's prepared to pitch in after a federal rescue plan for Detroit's Big Three Automakers -- Ford ( F), GM and Chrysler -- failed to pass the Senate last week.

Ford gave up 1.6% to $3.13, while GM gained 4.2% to $4.25 on Wednesday.

Tracking commodities, after edging up at the session's open, crude oil fell 91 cents to settle at $43.60 a barrel. OPEC is scheduled to meet on Wednesday to evaluate the effectiveness of its earlier decision to cut production targets by 1.5 million barrels per day, and to weigh the need for more cuts. Another equal or greater OPEC production cut, which could help stabilize oil prices that have fallen with global economic hardships, is expected.

Gold rose $6.20 to settle at $842.70 an ounce.

Longer-dated U.S. Treasury securities were rising in price. The 10-year was rising 2 3/32, to yield 2.3%, and the 30-year was rising 3 18/32, yielding 2.8%. The dollar was weaker against the euro, pound, and yen.

Overseas, European exchanges such as the FTSE in London and the DAX in Frankfurt edged higher. In Asia, Japan's Nikkei ended lower, while Hong Kong's Hang Seng ended with slight gains.

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