The Dow Jones industrial average gained 117.40 points, or 1.41 percent, to 8,416.76.Financial shares were leading the way, as the Federal Reserve's rate cut assuaged fears of a credit crunch and recession, said John Shaughnessy, chief market strategist at Advest Inc.
The big banks and brokers "were the laggards and now they will become the leaders," Shaughnessy said. The Fed's move will ease access to capital, which was becoming increasingly tight in the past weeks after the near collapse of hedge fund Long-Term Capital Management.
Strategists said the market may turn volatile in the afternoon, ahead of options and futures expiration of the S&P 500 Index.
Meanwhile, the bond market recovered after falling on its face earlier on. The 30-year bellwether was off a mere 1/32 to yield 4.97 percent.
Still, caution will not be thrown to the wind since the lingering concern that the Fed cut rates because it knows something the market doesn't will continue to obsess investors, market watchers observed.
Global markets also rallied. Asia cheered the stunning move by the Fed - which left the market breathless because it came between meetings - with the Nikkei 225 index rising 285.17 points, or 2.19 percent, to 13,280.54. The market also greeted with approval the passage by the Upper House of the government's bank stabilization package that is intended to breath life into Japan's sick banks. In Hong Kong, the Hang Seng index surged a mammoth 8.99 percent, or 806.59 points, to 9,777.01.
In Europe, Frankfurt's DAX index rose 2 percent and London's FT-SE 100 rose 1.5 percent.
Stocks also got a lift Friday from expectations that another rate cut may come at the Fed's next policy-making committee meeting in November.
Fueling those expectations was a new Labor Department report Friday that said inflation disappeared in September. A separate Fed report showed production at th nation's factories, mines and utilities fell 0.3 percent in September.
Advancing issues outnumbered decliners by a 2-to-1 margin on the New York Stock Exchange, where volume came to 541.90 million shares, up from 335.51 million shares on Thursday.
The Standard & Poor's 500 index was up 8.13 at 1,055.61, and the technology-heavy Nasdaq composite index was up 12.32 at 1,623.33.
On Thursday, the Dow soared 331.35 points, or 4.2 percent, to 8,300.13. It was the third-largest point gain ever for the storied index and the first close above 8,300 since Aug. 26. At 3:15 p.m. ET, the Federal Reserve said it had slimmed the federal funds rate by 25 basis points to 5 percent and the discount rate by 25 basis points to 4.75 percent.
In a statement, the Fed cited "growing lender caution" and "unsettled financial markets" for its decision to slim both the discount and Fed Funds rate.
The federal funds rate, the Fed's chief monetary policy lever, is the rate banks charge each other for overnight loans. The Fed last trimmed this rate Sept. 29 to 5.25 percent from 5.50 percent. The discount rate is the rate that banks pay to borrow funds from the Fed itself.
It is unusual for the central bank to make a rate move between meetings of its policy-setting Federal Open Market Committee. The last time it do so was in April 1994.
But over the past week, speculation had become rampant that the Fed might cut rates in advance of the next FOMC meeting Nov. 17, particularly following a London Times article indicating that the Fed had decided to cut rates during a conference call last Friday.