Citigroup Inc., Bank of America Corp. and Fannie Mae led the Standard & Poor's 500 Financials Index to its biggest gain in eight years on expectations the Fed's move will spur lending. Washington Mutual Inc. climbed the most since 2000 on speculation the largest savings and loan will get a cash infusion from an outside investor. All 10 industry groups in the S&P 500 rose except for health-care companies, which fell after WellPoint Inc. cut its earnings forecast.
The S&P 500 added 47.28 points, or 3.7 percent, to 1,320.65, climbing the most since October 2002 and trimming its decline for the year to 10 percent. The Dow Jones Industrial Average surged 416.66, or 3.6 percent, to 12,156.81. The Nasdaq Composite Index increased 86.42, or 4 percent, to 2,255.76. Almost 11 stocks gained for every one that fell on the New York Stock Exchange.
The S&P 500 rebounded from the lowest level since August 2006 as 479 of its members advanced. Yields on two-year Treasury notes gained the most since March 1996, as the Fed's move to relieve the credit crisis prompted investors to dump holdings of government debt. The dollar rose the most in six months against the yen and rebounded from a record low versus the euro.
Financial shares in the S&P 500 gained 7.4 percent as a group and rebounded from the lowest level since May 2003.
The Fed said it plans to lend Treasuries in exchange for mortgage-backed securities and other debt that has plunged in value as homeowners defaulted on their payments. Banks around the world have posted $188 billion in writedowns and credit losses stemming from the collapse of the subprime-mortgage market. The S&P 500 Financials Index had lost 20 percent this year through yesterday.
By lending Treasuries in exchange for mortgage-backed securities, the Fed will allow banks to switch debt that is less liquid for bonds that are easily tradable. Fed officials anticipate the so-called primary dealers that trade directly with the central bank, including Goldman, Bear Stearns Cos. and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash, helping the dealers shore up their balance sheets.
Fed officials told reporters on condition of anonymity that the program may be increased as needed. The move may also allow the central bank to cut interest rates less drastically than previously expected, leading to lower inflation.
Stocks also rose after the Commerce Department reported the January U.S. trade deficit was smaller than forecast. The gap grew 0.6 percent to $58.2 billion, the Commerce Department said. Exports increased 1.6 percent to the highest level ever.
The Russell 2000 Index, a benchmark for companies with a median market value 96 percent less than the S&P 500's, climbed 4.6 percent for the biggest rally since July 2002. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 3.6 percent to 13,286.61. Based on its advance, the value of stocks increased by $580.1 billion.