Markets sigh with relief after Fed acts

— -- Stability and calm returned to financial markets Wednesday amid growing optimism that the Federal Reserve's recent moves will help avert a widely feared credit crisis.

Despite more headlines about mortgage-related problems, the Standard & Poor's 500 index rose 17 points to 1464, putting it up 3.2% for the year just a week after it was in the red. The Dow Jones industrial average has recovered 390 points from its low last week, partly due to its 145-point gain Tuesday to 13,236.

The recovery has begun to fix the damage to investors' portfolios the past month. The DJ Wilshire 5000, which measures nearly all stocks, is up $750 billion in value the past week. "We're arresting the immediate panic," says Jim Paulsen of Wells Capital Management. "There are signs of repair going on."

Meanwhile, the flight to safety in the credit market continued to reverse. The price of three-month Treasury bills fell for the second day, pushing the yield up to 3.66% from a low of 3.09% on Monday.

"The market is finding some stability," says Geoffrey Schechter, bond fund manager at MFS Investment Management. "Right now, it's hard to argue that the Fed has done anything wrong."

Three of the banks said in a joint statement they had "substantial liquidity" and could "borrow money elsewhere on more favorable terms." But they said it was important to "take a leadership role" in demonstrating the value of the discount window.

Borrowing from the Fed is usually viewed as a sign of weakness, but this time was different and actually comforted credit markets, says Wayne Abernathy, executive director for financial institutions at the American Bankers Association. He says it appeared federal officials asked bankers in good condition to set an example. The Fed's moves have helped to restore confidence among lenders, he says.