NEW YORK (Reuters) - Stocks rallied on Tuesday after the Federal Reserve rewrote its playbook by slashing borrowing costs to a record low, even zero, and pledging more unconventional steps to fight the deepest recession in generations.
Banks led the charge higher, spurred both by the Fed's move to cap its target lending rate at a quarter percentage point and by a quarterly loss from Wall Street icon Goldman Sachs that was not as gruesome as many feared. Goldman's stock gained more than 14 percent, outshining an 11 percent advance in the S&P 500's financial index.
Stocks were up modestly all day on optimism that the Fed, at its last meeting of 2008, might take dramatic measures to combat the credit crisis and global economic slowdown. But the rally caught fire right after the central bank released its statement in mid-afternoon, pushing the benchmark Standard & Poor's 500 index to its highest closing level since November 10 and driving each of the major U.S. stock indexes to their best one-day performance for the month.
"The rate cut was definitely more than a lot of people were expecting and that's really helping the market here. But the big takeaway here is Bernanke's going back out into the market and trying to loosen things up in credit," said Jocelynn Drake, market analyst at Schaeffer's Investment Research in Cincinnati, Ohio.
"We've got a Fed that's willing to really go the distance for the market right now."
The Dow Jones industrial average rose 359.61 points, or 4.20 percent, to 8,924.14. The Standard & Poor's 500 Index jumped 44.61 points, or 5.14 percent, to 913.18. The Nasdaq Composite Index climbed 81.55 points, or 5.41 percent, to 1,589.89.
Tuesday's advance marked the largest point and percentage gain for the Dow since November 24 and pushed the blue-chip Dow average up 1.1 percent for the month to date.
BANKS AND BUILDERS LOVE THE FED
In a unanimous vote, the Fed made a larger-than-expected cut to the benchmark federal funds rate by at least three-quarters of a percentage point to a target range of zero to 0.25 percent from its current 1 percent.
The U.S. central bank said that it will employ all available tools to promote the resumption of growth and preserve price stability.
Shares of Goldman Sachs surged after the company reported its first quarterly loss since going public in 1999, but its results were not as dire as some had anticipated.
JPMorgan Chase & Co was the Dow's top performer, up 13 percent at $32.35, while Goldman Sachs' stock jumped 14.4 percent to $76 on the New York Stock Exchange.
Home builders' shares also jumped following the Fed's huge rate cut, which investors believe will help stimulate lending and home buying. The Dow Jones U.S. Home Construction Index soared 11.2 percent.
The stock of luxury home builder Toll Brothersleaped 9.2 percent to $22.22, while shares of D.R. Horton Inc, the largest U.S. home builder, gained 11 percent to $7.79.
