NEW YORK (AP) -- Wall Street barreled higher Wednesday for the second day in a row, giving the Dow Jones industrial average its biggest two-day point gain in five years after a Federal Reserve official hinted that the central bank may lower interest rates again.
Investors' renewed hopes for a rate cut added to their relief that companies that made losing bets on subprime mortgages, such as Citigroup Inc. and Freddie Mac, are coming up with ways to raise cash. The market was clearly optimistic that at least some of the damage from the months-long credit crisis was finally being mitigated.
However, Wall Street has been fickle in recent months, with the Dow often rising and falling by triple digits, and no one is betting that the mortgage crisis that tripped up the nation's financial industry this year is over or that the market's huge gains so far this week will stick. Despite its spectacular advance, the Dow remains more than 6 percent below its Oct. 9 record close over 14,000, having plunged due to worries that the housing market's slump will lead to further losses for banks, and that the Fed can't keep slashing rates.
"The market's perception of whether the Fed cuts or not really changes by the day," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "We still have more data to come."
Early Wednesday, Fed Vice Chairman Donald Kohn told the Council on Foreign Relations that recent financial turbulence has reversed some of the improvement seen in markets in previous weeks, and could squeeze credit for households and businesses. He said tight financial conditions may merit "offsetting" policy from the central bank.
The possibility for lower rates seemed more compelling to investors than persistent concerns about a slowdown in economic growth. The Fed has already reduced rates at its last two meetings, and continues to inject billions of dollars into the financial system through repurchase agreements to help calm the shaky markets. The central bank will hold its final rate-setting meeting of the year Dec. 11.
Plunging oil and gold prices also lifted investors' hopes for a rate cut -- if inflation is in control, policy makers have less reason to keep rates high. The Fed's Beige Book of economic activity around the country said with the economy expanding at a reduced pace, most core prices are stable or down slightly.
The Dow soared 331.01, or 2.55 percent, to 13,289.45, adding to the blue chip index's 215 point gain on Tuesday and giving the market's best known indicator its largest two-day point gain since Oct. 11, 2002, and largest two-day percentage gain since Nov. 21, 2002.
Wednesday's jump was also the biggest one-day percentage gain for the Dow since April 2, 2003.
The broader Standard & Poor's 500 index climbed 40.79, or 2.86 percent, to 1,469.02, logging its best two-day point gain since April 19, 2001.
The Nasdaq composite index shot up 82.11, or 3.18 percent, to 2,662.91, giving the technology-dominated index its largest two-day point gain since March 4, 2002.
Government bonds slipped as stocks rallied. The yield on the benchmark 10-year Treasury note rose to 4.05 percent from 3.95 percent late Tuesday -- and ticked up to 4.05 percent in afterhours trading.
Crude oil posted its own two-day milestone Wednesday, falling $3.80 to settle at $90.62 a barrel on the New York Mercantile Exchange after dropping $3.28 Tuesday. The $7 two-day plunge was the second-largest since the Nymex introduced a futures contract 24 years ago.
The dollar fell against the euro and pound, but rose against the yen.
"Everything we're seeing in the market is revolving about credit and encouragement that the Fed is going to bail us out again," said Alexander Paris, economist and market analyst for Chicago-based Barrington Research. "Investors are kind of ignoring the economic news like housing and durable orders that were all weaker than expected."
Indeed, signs that the Fed will reduce rates to keep cash flowing freely helped overshadow reports that in October, sales of existing homes fell for the eighth consecutive month and orders for big-ticket manufactured goods fell for the third straight month.
Wall Street has had a volatile week so far. Economic and credit market concerns sent the Dow plunging 240 points on Monday, pushing the index to the level of a 10 percent market correction.
On Tuesday, the market rebounded, finding some consolation after the investment arm of Arab city state Abu Dhabi invested $7.5 billion in Citigroup. Then, late Tuesday, government-sponsored mortgage investor Freddie Mac halved its dividend and said it would sell $6 billion of preferred stock, bolstering investors' sentiment that financial companies have some recourse.
On Wednesday, Freddie Mac rose $3.69, or 14.3 percent, to $29.42 on Wednesday, while its larger counterpart, Fannie Mae, rose $2.90, or 9.9 percent, to $32.30.
Citigroup rose $1.97, or 6.5 percent, to $32.29.
But the stock market still has quite a ways to go before breathing easy after this year's crisis in mortgages and the global financial industry's tens of billions of dollars in debt-related losses. Unless the Dow makes further gains this week, November will be the index's worst month since September 2002. And as recently as Monday, the S&P 500 index was in negative territory for the year.
Advancing issues led decliners by about 7 to 1 on the New York Stock Exchange, where consolidated volume came to 4.45 billion shares, compared with 4.17 billion shares traded Tuesday.
The Russell 2000 index of smaller companies rose 26.77, or 3.60 percent, to 770.04.
Overseas, Japan's Nikkei stock average fell 0.45 percent. Britain's FTSE 100 rose 2.70 percent, Germany's DAX index rose 2.55 percent, and France's CAC-40 rose 2.34 percent.
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