Steady Fed calms markets

Stocks recover a chunk of Monday's huge losses in day of up-and-down trading

NEW YORK -- 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.

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 continuing 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 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, such as 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 1.3 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.

Light, sweet crude for October delivery fell $3.70 to settle at $92.01 in New York.

Overseas, markets in Asia fell sharply Tuesday after being closed Monday. Japan's Nikkei stock average fell 4.95 percent. Hong Kong's Hang Seng index lost 5.44 percent. In Europe, Britain's FTSE 100 fell 3.43 percent, Germany's DAX index lost 1.63 percent, and France's CAC-40 fell 1.96 percent.