Investors upset by the Fed's quarter-point rate cut Tuesday were relieved by the central banks' commitment to help the economy weather the ongoing credit and mortgage crisis.
The Fed said it had agreed with the European Central Bank and the central banks of England, Canada and Switzerland to confront what it called elevated pressures in the credit markets. The Fed said it will create a temporary auction facility to make funds available to banks and set up lines of credit with the European and Swiss central banks for additional resources.
"I think it's certainly a strong measure to ease this credit crunch and I think it will encourage banks to use the discounted borrowing. If banks won't lend to each other, then at least the central banks will lend to them," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
Bond prices fell as investors returned to the stock market. The 10-year Treasury note's yield, which moves opposite the price, rose to 4.13 percent from 3.97 percent late Tuesday.
On Tuesday, stocks plummeted after the Fed lowered the target fed funds rate by a quarter point to 4.25 percent, disappointing investors who hoped for a more aggressive move to boost the economy during the seize-up in credit and rise in home foreclosures. Investors were also unnerved that the central bank did not implement a larger cut in the discount rate - the rate the Fed charges banks - and did not offer a more definite pledge to cut rates further.
"We've thought for some time the market was going to be volatile and trendless until the end of the year," said Brian Gendreau, investment strategist for ING Investment Management. "The Fed rate cut didn't do it to help us get through this weak patch in the economy. These new liquidity vehicles, and coordination with foreign central banks, is what investors were looking for."