Wall Street cheers Fed, day 2

NEW YORK (CNNMoney.com) -- Stocks surged Wednesday morning, as investors continued to hail the Federal Reserve's decision to cut a key short-term interest rate by a half-percentage point.

The Dow Jones industrial average (Charts) added around 110 points over 2 hours into the session. The blue-chip leader had jumped 336 points Tuesday, scoring its biggest one-day point gain in nearly 5 years.

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The broader S&P 500 (Charts) index gained 1.1 percent and stood less than 20 points below its all-time high from July.

The tech-heavy Nasdaq composite (Charts) climbed 1 percent. The Russell 2000 (Charts) small-cap index added 1.9 percent, after rising 3 percent on Tuesday.

Treasury bond prices slumped, boosting the corresponding yields. The dollar slumped versus the euro. Gold prices jumped and oil prices flirted with fresh record trading highs.

Stocks surged Tuesday after the central bank cut the fed funds rate by a half-percentage point to 4.75 percent, reassuring investors that it was taking an aggressive response to the credit and mortgage market meltdown.

Most Wall Streeters had been expecting the bank to cut the fed funds rate for the first time in four years, but had been divided as to whether a quarter- or half-percentage point would be more appropriate. The fed funds rate impacts a variety of consumer loans.

In its statement, the central bank addressed the recent turmoil in the financial markets, acknowledged the threat it could pose to the economy, and left the door open for more rate cuts in the future.

The move was important for the economy and for stock investors, said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. "It's very positive. It shows the Fed stands ready to act."

Tuesday's economic news seemed to support the Fed's decision, including reports showing continued weakness in housing and little inflationary pressure.

In particular, the mild inflation reading was allowing investors to come in and continue to buy Wednesday, Sparks said.

Morgan Stanley (Charts, Fortune 500) reported a drop in quarterly earnings versus expectations for a rise, and a smaller-than-expected rise in quarterly revenue. The bank is one of many this week reporting results and investors are looking closely to see how hard the sector has been hit by the credit and mortgage market turmoil.

Despite the disappointing results, Morgan Stanley stock inched higher, protected by the broader financial sector advance.

Mortgage lenders including Countrywide Financial (Charts, Fortune 500) and Accredited Home Lenders (Charts) both bounced.

The Amex Securities Broker/Dealer index jumped 2 percent.

Gains were broad based, with 26 out of 30 Dow components rising, led by economically-sensitive stocks such as Alcoa (Charts, Fortune 500), Caterpillar (Charts, Fortune 500) and Honeywell (Charts, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners trounced losers nearly three to one on volume of 630 million shares. On the Nasdaq, advancers beat decliners by more than two to one on volume of 860 million shares.

Housing starts fell to a 12-month low in August, according to a government report that also showed a big drop in building permits, a measure of builder confidence.

But another government report was more positive, showing a surprise drop in consumer prices in August, versus forecasts for a flat reading.

Treasury prices tanked, pushing the yield on the 10-year note to 4.56 percent from 4.47 percent late Tuesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar slumped against the euro and was little changed versus the yen.

U.S. light crude oil for October delivery rose 59 cents to $82.10 a barrel on the New York Mercantile Exchange, briefly hitting a fresh record trading high of $82.50 after a report showed a tepid rise in weekly crude oil and gas inventories.

Oil prices ended the previous session at a record closing high. However, the record price remains below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

COMEX gold for December delivery rallied $6.30 to $730 an ounce.