NEW YORK — Even by Wall Street standards, the "Bernanke bounce" was a supersized surprise.

The Federal Reserve's interest rate cut yesterday, engineered by chief Ben Bernanke, was bigger than investors expected. It was also bolder than many Fed pundits envisioned. And it elicited a bullish reaction from stock investors, who drove the Dow Jones industrial average to its biggest point gain in nearly five years.

The Dow skyrocketed 335.97 points, or 2.5 percent, to 13,739.39. The blue-chip gauge is now up 10.2 percent for the year and is just 1.9 percent off its July 19 high of 14,000.41.

Wall Street, of course, has been clamoring for a sizable rate cut for weeks amid mounting evidence that the fallout from the implosion of the real estate market was jeopardizing the economy's growth. Rate cuts lower borrowing costs for consumers on loans, such as home-equity lines of credit, adjustable-rate mortgages and credit cards. The hope is that rate cuts will alleviate some of the pressure on homeowners looking to refinance mortgages, as well as help seized-up credit markets start behaving more normally, says David Kelly, an economic advisor at Putnam Investments.

"Rate cuts can have a meaningful impact," Kelly says. "It may very well help reduce the angst in the mortgage market." It may also expand the pool of homebuyers as financing becomes more affordable, he adds.

GREASING WHEELS

But it was not just the size of yesterday's cut, which shaved a half of a percentage point off the target for the federal funds rate (a quarter-point was expected), that put investors in a better state of mind. The aggressive easing, which reduced the fed funds rate to 4.75 percent, also sent a message to markets that the Bernanke-led Fed is flexible and will act decisively when warranted.

"It shows an aggressiveness and a willingness to think outside the box," says Keith Hembre, chief economist at First American Funds. "It shows that the Fed gets it." A tinier cut would have not "achieved the near-term goal of greasing the wheels of the financial markets."

The Fed's statement did not indicate whether it may reduce rates even more in coming months. But Rich Golinski, money manager at Bingham Osborn & Scarborough, says the fact that the Fed acted so aggressively yesterday is a sign that more cuts are forthcoming. Golinski says Bernanke might have hurt his inflation-fighting credentials by cutting a half-point.

He questions if the stock rally will hold. "The underlying issues hobbling the economy are still there," Golinski says.

Even if the economy continues to struggle, the market knows the Fed will step in.

Says Douglas Peta, a market strategist at J.&W. Seligman: "The market can now count on the Fed as an ally."

INFLATION WORRIES

A big worry in the bond market is that the Fed's rate cut will fuel inflation, which erodes the value of a bond's interest payments. After the Fed's announcement yesterday, the yield on the benchmark 30-year Treasury bond rose to 4.75 percent from 4.71 percent.

The financial markets also displayed inflation worries by driving up the price of gold, a traditional hedge against inflation, to a 27-year high of $732.70 an ounce in the futures market.

The dollar fell against the euro — to $1.397, a new low — as investors shifted their money to Europe, where interest rates are higher.