Wall Street rallies on Fed cash injection

NEW YORK (Reuters) – U.S. stocks rallied on Tuesday, led by financial shares, after the Federal Reserve said it would add up to $200 billion to strained credit markets as part of a coordinated effort with other central banks.

In an surprise announcement, the Fed said it was expanding a securities lending program and will accept a broader base of securities as collateral, including many mortgage bonds whose value has declined as the housing bubble burst.

Shares of mortgage-related companies and banks rallied following the Fed announcement, helping the market recover after three days of losses. Stocks had been close to their lows for the year as recession fears mounted.

Home builders’ shares also rallied.

Analysts said the Fed’s action could help boost mortgage lending and ease the drag of the housing slump on the broader economy.

“It’s a good move. Some of the worries we had involved the liquidity issue,” said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm in Toledo, Ohio.

“This is one step to try and stimulate the recovery process. The timing is interesting because the stock market was testing the bottom end of the range.”

The Dow Jones industrial average (.DJI) jumped 235.20 points, or 2.00 percent, to 11,975.35. The Standard & Poor’s 500 Index (.SPX) rose 24.32 points, or 1.91 percent, at 1,297.69. The Nasdaq Composite Index (.IXIC) gained 41.93 points, or 1.93 percent, to 2,211.27.