"Maybe the Fed and the ECB [European Central Bank] have been able to get ahead and avert a liquidity crisis around the turn," said analysts at Action Economics.
The Fed said U.S. banks had borrowed $40 billion for 28 days at 4.65%, with a total of 93 banks bidding in Monday's auction, asking for $61.6 billion. The bid-to-cover ratio was 3.08. .
Up 40 points before the Fed released its results, the Dow Jones Industrial Average furthered its advance in their wake, gaining 56.2 points to 13,288.6.
Of the Dow's 30 components, 16 traded higher, with financials fronting the blue-chip index's early gains. Citigroup Inc. was up 1.8% and JP Morgan Chase gained 2.3%.
The S&P 500 climbed 7.27 points to 1,462.25, while the Nasdaq Composite jumped 10.71 points to 2,606.74.
Volume on the New York Stock Exchange neared 207 million, and advancing stocks outran those declining 4 to 3. On the Nasdaq, 294 million shares exchanged hands, and advancing stocks edged just ahead of those declining.
Morgan Stanley unveiled a new $5.7 billion write-down on its way to posting a fourth-quarter loss of $3.59 billion, leading CEO John Mack to refuse a bonus. The Wall Street Journal reported that top executives at Bear Stearns will also forgo bonuses this year.
The trend of Asian and Middle Eastern investors taking stakes in Western financials continued, with China Investment Corp. taking a $5 billion Morgan Stanley stake.
Elsewhere, RealtyTrac reported that November foreclosures were up nearly 68% from a year ago, though down 10% from October.
On the interest-rate front, minutes from the last Bank of England meeting revealed the U.K. central bank voted unanimously to cut rates, a surprise for economists, who were expecting a closer decision.
After the close of trading, Nike and Oracle Systems will announce results.
Elsewhere, Palm dropped in pre-open trading after the handset-devices maker forecast current quarter revenue up to 13% below average analyst estimates.
TD Ameritrade lifted its earnings outlook. Rival E-Trade rose in pre-open trading.
The dollar weakened against the yen while it rose vs. the euro. Crude-oil futures rose 20 cents to $90.28 a barrel.
The Nikkei 225 ended 1.2% lower in Tokyo. In London, the FTSE 100 was flat.
U.S. stocks closed a choppy session with gains on Tuesday, with Best Buy and Adobe Systems closing higher after quarterly reports. The Dow industrials rose 65 points, the S&P 500 ended 9 points higher and the Nasdaq Composite tacked on 21 points.
By Kate Gibson