Updated from 4:12 p.m. EDTWith a kick from the Fed, stocks in New York turned a down day around to lock in 1% to 2% gains after the government said it would expand its quantitative easing efforts. Bank of America ( BAC)and Citigroup ( C) each surged more than 22%, leading the Dow Jones Industrial Average, which rose 90.88 points, or 1.2%, to 7486.58, while the S&P 500 added 16.23 points, or 2.1%, to 794.35. The Nasdaq was better by 29.11 points, or 2%, to 1419.22, as it celebrated the prospective buyout of Sun Microsystems ( JAVA). The Federal Open Market Committee wrapped up its meeting on Tuesday afternoon, saying it would keep its key interest rate at record low rates, not surprisingly. Of note, the FOMC said it would purchase up to $750 billion of agency mortgage-backed securities, bringing its total purchases up to $1.25 trillion this year. The Fed will also purchase up to $300 billion of longer-term Treasury securities over the next six months to help conditions in private credit markets, and said it could expand the Term Asset Backed Securities Loan Facility (TALF) to include other financial assets. "These are the right steps because it continues to show the fed is moving aggressively to stabilize these credit markets, and that commitment alone is going to have a positive effect overall on stabilizing the markets and getting the conditions for credit flows," says Brian Bethune, chief U.S. financial economist at IHS Global Insight. Also, as a complement to their other balance-sheet programs, buying longer-term Treasuries makes a lot of sense, says Bethune. "The longer-term Treasury market has been extremely volatile, in terms of pricing and yield, and stabilizing conditions there will have a stabilizing effect on the entire spectrum of borrowing costs -- a lot of banks mark to the long-term treasuries."
Longer-dated Treasuries moved sharply with the announcement. The 10-year note, which was adding 17/32 to yield 3% before the announcement, was recently rising 4-10/32, yielding 2.5%. The 30-year, which was rising 1-5.5/32, yielding 3.8% earlier in the day, was gaining 5-16/32 to yield 3.5% after the announcement. The dollar plunged on the Fed news, and was weaker against the yen, euro and pound. Adding some early fuel to equities, Sun Microsystems surged 78.9% to $8.89, after media reports said that IBM ( IBM) is
in discussions to pick up Sun for $6.5 billion in cash -- or more. The Fed notes diverted attention from the testimony of AIG ( AIG) chief Edward M. Liddy, who took over as chairman and chief executive of AIG at the government's request, about the now infamous bonuses slated for employees of the 80%-taxpayer-owned insurance giant. "It's the personification of a culture clash between Wall Street and Washington," says Jack Ablin, chief investment officer at Harris Private Bank, of the AIG bonus fiasco. "I think Washington is creating a wedge between Main Street and Wall Street, and it makes for great grandstanding, but not capital markets." Meanwhile, The Labor Department said Wednesday the consumer price index, the most widely cited inflation indicator, rose 0.4% in February, or 0.2% when factoring out food and energy prices. Both increased a tenth of a percentage point more than expected. "It could signal a turning point in investor perception of deflation vs. inflation I think that many investors lose sight of the difference between monetary deflation and asset price devaluation," says Ablin. "We can have inflation go up and asset prices drop - they are two separate phenomena."
In the latest on one of the biggest scandals to ever rock Wall Street, the accountant for Ponzi scheme mastermind Bernie Madoff, David G. Friehling, who became Mr. Madoff's primary auditor since the early 1990s, was charged on Wednesday with securities and investment adviser fraud in connection with Mr. Madoff's now infamous $50 billion scheme. Looking at commodities, oil fell $1.02 to settle at $48.14 a barrel in light of a government report that said inventories were rising, while gold fell $27.70 to $889.10. Stocks in Europe were largely lower, while stocks in Asia were mixed. The FTSE in London and DAX in Frankfurt were lower by 1.6% and 0.2%, respectively.