U.S. & World

NEW YORK (CBS News) ― Wall Street stormed higher Tuesday as investors, optimistic following stronger-than-expected earnings from two big investment banks, were also galvanized by the Federal Reserve's decision to cut interest rates by three-quarters of a percentage point.

After the Fed's decision was announced, the Dow Jones industrial average first gave back half of its 300-point gain, then shot higher, ending the day up about 420 points at the 12,392 level, according to preliminary calculations.

Many investors were expecting the Fed to cut rates a full point, but appeared to overcome their early disappointment, especially since a 0.75 point cut is substantial. The target rate is now at 2.25 percent - its lowest level since December 2004, and less than half what it was last summer. The Fed began lowering rates exactly six months ago, after the credit markets seized up due to soaring defaults in subprime mortgages.

In its statement accompanying the rate decision, the Fed said "recent information indicates that the outlook for economic activity has weakened further," but also that "uncertainty about the inflation outlook has increased."

Quarterly results from Lehman Brothers Inc. and Goldman Sachs Group Inc. early Tuesday gave solace to a market fearful about investment banks weakening further - and hurting the rest of the economy - after losing bets on mortgage-backed securities. After Sunday's news that the stricken Bear Stearns Cos. was being bought by JPMorgan Chase & Co. at a bargain price of $2 a share, both Lehman and Goldman posted quarterly profits early Tuesday that were significantly lower than they were a year ago, but higher than analysts predicted.

"The overwhelming news this morning was the Lehman and Goldman Sachs earnings," said Jim Herrick, director of equity trading at Baird & Co. "The earnings this morning allayed investors' fears that there's going to be a hard collapse."

Wall Street's advance was heartening, but investors were also well aware that over the past six months, stocks have had many bursts higher, only to give them back at the first sign of credit market or economic trouble. It will take some time before anyone knows whether the market is back on a true upward track, or is just staging a bear market rally.

After its last scheduled meeting Jan. 30, the Fed reduced rates by a half-point, pointing to not only stressed financial markets, but also tightening credit for businesses and households; a deepening in the housing contraction; and softening in the labor markets. The central bank repeated these concerns in its statement Tuesday.

As an example of the borrowing crisis spreading beyond the housing market, CBS News correspondent Anthony Mason reports Michigan and New Hampshire have cut back on some student loans because they can't find lenders.

Thomas Graf, who heads the nonprofit Massachusetts Education Financing Authority, isn't sure he'll be able to raise the $600 million needed for the next school year.

"I think what happening here is bigger than just student loans. It's the whole capital markets. Investors have moved away from anything that's risky or perceived as risky," Graf said.

Even auto sales now appear headed for their worst year since 1994, in part because auto loans are harder to come by.

The Fed signaled that it stood ready to cut rates further if necessary, saying that "downside risks to growth remain." Chairman Ben Bernanke Bernanke and other Fed officials have said in recent comments that they view the threat of economic weakness as a bigger risk at the moment than inflation given the risks to financial markets.

In Jacksonville, Fla., Tuesday, President Bush said the government will take further action - if necessary - to help the sagging economy.

Treasury Secretary Henry Paulson made the rounds of the morning TV shows Tuesday to underscore the administration's commitment to keeping turmoil in the financial markets from worsening a struggling economy.

"The priority we have is a stable, orderly financial" market, he told CBS News' The Early Show.

The spectacular fall of Bear Stearns, which had been the nation's fifth largest investment bank, has raised concerns about what other banks might fail as a result of multibillon-dollar losses that began last year with rising defaults on subprime mortgages, loans made to borrowers with weak credit histories.

In other moves, the Fed last week announced that it would lend up to $200 billion of Treasury securities that it owns to investment banks starting March 27 for a period of up to 28 days in return for a like amount of the investment banks' shunned mortgage-backed securities. The Fed also announced recently that it was boosting the size of special loans it has been making since December to commercial banks.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)