(CBS/AP) Wall Street ended another tumultuous session with a sizable gain Tuesday, partly recovering from its worst sell-off in years after the Federal Reserve said it was keeping interest rates steady. The central bank soothed fears of a worsening financial crisis even as the market waited to learn the fate of troubled insurer American International Group Inc.
In a statement accompanying its decision, the Fed noted the growing strains in the financial markets a day after the Dow Jones industrials plunged 504 points in reaction to continuing turmoil in the financial sector. The Fed also noted the ongoing weakening of the labor market. But it also sought to give some reassurance by saying it expected its policy moves to foster moderate economic growth over time.
The Fed has cut its target federal funds rate by 3.25 percentage points to its current level of 2 percent over the past year. Many on Wall Street expected the Fed to keep rates steady but there was some hope that the central bank would try to calm uneasy financial markets with a rate cut.
Still, the fact that the Fed didn't lower rates was a sign that it doesn't believe the economy needs that type of stimulus. It reiterated that it believed its moves to inject more liquidity into the banking system to help struggling financial institutions would help them, and in turn the economy overall.
"This was the right thing to do," said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. "I just don't think the Fed should be responding to the financial market crisis at this stage."
He contends other moves, like broadening the type of collateral the Fed accepts from banks and adding money to the banking system are more effective at addressing credit troubles.
The Dow rose 141.51, or 1.30 percent, to 11,059.02, after falling about 100 points immediately after the Fed announcement. The Dow at turns rose and fell as much as 175 points in fractious trading; on Monday, it suffered its largest drop since the September 2001 terror attacks.
Broader stock indicators advanced. The Standard & Poor's 500 index rose 20.90, or 1.75 percent, to 1,213.60, and the Nasdaq composite index rose 27.99, or 1.28 percent, to 2,207.90.
On Monday, the Dow fell 4.4 percent, the S&P gave up 4.7 percent and the Nasdaq fell 3.6 percent.
Bond prices fell sharply Tuesday as investors turned away from the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.52 percent from 3.41 percent late Monday. The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude for October delivery fell $3.70 to settle at $92.01 a barrel on the New York Mercantile Exchange, bringing its two-day decline to $10, as investors placed bets that a slowing economy will crimp demand. Gas prices continued to following the disruption to supplies brought by Hurricane Ike, though they were expected to moderate in the coming weeks.
Worries about AIG's well-being have intensified this week after several ratings agencies downgraded the company. Investors fear that a failure by the world's largest insurer would touch off a wave of financial turmoil.
But speculation that the company might be working out a loan from the government corralled some of the market's worries about the company and the stock finished well off its lows. The stock fell $1.01, or 21 percent, to $3.75 after trading as low as $1.25.
Markets around the world have been reeling this week from the bankruptcy filing of Lehman Brothers Holdings Inc. and the quickly assembled weekend sale of Merrill Lynch & Co. to Bank of America Corp. Investors worry that tectonic shifts in the power structure of Wall Street signal that the financial sector's trouble with imperiled credit are far from over.
Barclays PLC confirmed Tuesday that it is interested in acquiring some assets of Lehman Brothers.
Veteran trader Art Cashin told CBS News correspondent Anthony Mason that he believes there could be more casualties.
"This is the fifth time we've seen this movie. And you sit on the edge of your seat and yell at whichever character it is: 'Don't go into that woodshed!' But they keep going in," Cashin said.
Meanwhile, Republican presidential candidate John McCain on Tuesday called for a high-level commission to study the current economic crisis and claimed that a corrupt and excessive Wall Street had betrayed American workers.
His Democratic opponent, Barack Obama, continued to criticize McCain's remark Monday that "the fundamentals of our economy are strong." In a television ad released Tuesday, Obama's campaign asks: "How can John McCain fix our economy if he doesn't understand it's broken?"
But the partial recovery in shares of AIG as well and some of the other financial stocks that led the market lower Monday were a welcome boost to investor sentiment. JPMorgan Chase & Co. rose $3.74, or 10 percent, to $40.74, while Wells Fargo & Co. rose $3.93, or 13 percent, to $34.93.
Steven Goldman, chief market strategist at Weeden & Co., said investors are starting to examine even troubled sectors like banks to pluck out those that have managed to sidestep the worst of the credit troubles.
"There are some silver linings in a dire picture," he said, referring to some of the gainers.
Names that investors often rely on as safe bets in a weak economy also rose. Wal-Mart Stores Inc. advanced 51 cents to $62.14, while McDonald's Corp. rose 57 cents to $64.29.
The market showed little reaction to the first drop in the Labor Department's Consumer Price Index in nearly two years. The CPI fell 0.1 percent last month, while the index excluding food and energy costs edged up a mild 0.2 percent. Both figures were in line with analyst expectations.
In corporate news, Goldman Sachs Group Inc., the largest of the two big independent investment banks on Wall Street, posted its sharpest decline in earnings since becoming a public company in 1999. The company said quarterly earnings fell 70 percent from a year earlier and that it saw a marked decrease in client activity. The profit results were better than Wall Street had been expecting, though revenue fell short. The stock fell $2.49 to $133.01.
Morgan Stanley, Goldman's smaller rival, fell $3.49, or 11 percent, to $28.70 and reported better-than-expected results after the closing bell.
Dell Inc. warned that it sees a further softening in global demand in the current quarter. The computer manufacturer fell $2.01, or 11 percent, to $15.98.
Hewlett-Packard Co. announced plans Monday to cut 24,600 jobs, or about 8 percent of its work force, over the next three years as it works through its acquisition of technology-services company Electronic Data Systems Corp. HP shares were little changed early Tuesday. HP rose $3.08, or 6.8 percent, to $48.41.
The Russell 2000 index of smaller companies rose 20.89, or 3.03 percent, to 710.65.
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