"The Fed has found the right mix to stop the spread of the credit crisis," said Ken Tower, chief market strategist at Covered Bridge Tactical. "It doesn't mean that it's over and it won't get better tomorrow, but the outlook has brightened considerably."
The Dow Jones Industrial Average gained 80 points, or 0.7%, to 12,235. Of the Dow's 30 components, 21 traded higher, led by financial issues such as Citigroup Inc. , J.P. Morgan Chase and AIG .
On Tuesday, the Dow rallied 416 points, or 3.6%, its largest percentage climb since March 2003 and its fourth-biggest point jump ever.
"Single-day market action rarely carries huge meaning going forward," Tower said. "But big updays carry extra significance. There are very few occasions when we do see that kind of action and it does tend to happen near market bottoms."
Caterpillar , also a blue-chip stock, gained 5% after the construction and equipment manufacturer affirmed its earnings outlook.
The S&P 500 index rose 2.4 points to 1,323, while the Nasdaq Composite gained 18 points to 2,274.
Volume on the New York Stock Exchange reached 847 million shares and it nearly reached 534 million on the Nasdaq. There were roughly three advancing stocks for every declining ones in both markets.
Central banks step up
The Fed and other central banks announced Tuesday a set of new measures in an effort to counter a global credit crisis that has pressured the already ailing U.S. economy and threatened global growth.
Their plan allows banks and bond dealers to exchange mortgage-backed securities -- currently next to impossible to sell -- for Treasury bonds, which are among the most in-demand safe-haven assets around.
"The additional measures recently announced by the Fed seemed to have helped the tone in the credit markets," Citigroup's Fallon said. "However, new supply will take time to materialize given the market's inability to find a clearing price for many impaired assets."
News that mortgage applications fell 1.9% last week served to remind investors that woes in the housing market continue to weigh on credit markets and the economy.
"Addressing the broader issue of defaults and foreclosures in the U.S. housing market and the solvency issues that are more generally placing such a cloud over the global economic outlook will not be solved by liquidity management alone," said Andrew Cates, an economist at UBS.
Treasury bonds continued to gain Wednesday, sending yields lower, with investors taking back some safe-haven positions.
Investors also kept an eye on crude-oil prices, which resumed their course higher after earlier dipping on news of a big gain in weekly inventories. In recent action, crude for April delivery gained 10 cents to $108.82 a barrel. On Tuesday, crude finished at a record closing high of $108.75 a barrel, after almost hitting $110 overnight.
The dollar dropped against rivals -- particularly the euro after unexpectedly strong euro-zone figures.
Of companies in focus, Humana lost 21% after it cut its earnings outlook, following in WellPoint's footsteps.
Progenics Pharmaceuticals plunged 62% after it and Wyeth said a Phase 3 clinical trial of intravenous methylnaltrexone didn't meet its endpoint of reducing recovery time from colectomy surgical procedures, and didn't meet secondary measures of surgical recovery.
Take-Two Interactive , the target of a hostile bid from Electronic Arts , rose 1.3% after the video-game publisher lifted its earnings outlook due to orders for its latest "Grand Theft Auto" game and reported a smaller-than-forecast loss.
By Nick Godt