In a wave of early morning ecstasy, Wall Street traders pounced wildly on Uncle Sam’s surprise rescue move yesterday, driving up stocks more than 271 points in just minutes.
Fueling passions was the bold announcement by the Federal Reserve that it would begin funneling a total of $64 billion into the banking systems here and abroad over the next several weeks.
It was the biggest flood of money into the banking system since the cash crisis following the 9/11 terrorist attacks here.
But the euphoria was short-lived, as profit-taking pared down early gains.
The Dow fell into negative territory by midday before recovering slightly for a modest gain.
The Fed’s actions will allow banks to offer a broader range of collateral – which could include some of their mortgage-backed assets that are currently in limbo to borrow new billions.
The move has the potential to let banks here and aboard swap some of the junk mortgage paper on their books for dollars from the Fed.
“The Fed wants to sop up mortgages off the banks’ books and replace them with cash – most likely at 100-cents on the dollar,” said portfolio chief Peter Schiff, president Euro Pacific Capital.
Despite the positive reaction, some analysts fear the Fed’ plan could push inflation higher by heating up a new wave of commodity speculation. Oil, for example, shot up $4.37 to $94.39 a barrel here following the move.
“Clearly, the Fed is feeling its way in the dark here. Current conditions are unprecedented in modern times,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The Dow Jones industrial average, which tumbled sharply the prior day, ended 41.13 higher at 13,473.90. The S&P’s 500 index gained 8.94, or 0.61 percent, to 1,486.59. The Nasdaq added 18.79, or 0.71 percent, to 2,671.14.