By Nick Godt

Stocks will start next week riding a new wave of optimism after the Federal Reserve took extraordinary steps to lower borrowing costs, which helped the market score its first two back-to-back weeks of gains of the year.

"People in the stock market are encouraged by what the Fed is doing," said John Lonski, managing director at Moody's. "They're doing everything they can, and now some degree of their credibility is restored."

But with the two final sessions of the week ending lower and with upcoming data on housing, as well as key appearances by Treasury Secretary Timothy Geithner next week, some say the nascent rally could still trip up against some hurdles.

"I would like for the rally to continue, but it now looks a bit more precarious," said Robert Pavlik, chief market strategist at Banyan Partners. Still "we have a light economic calendar, so if we get numbers that show stabilization in housing and upbeat comments from Geithner, that would help."

Existing-home sales data for February come out Monday, followed by new home sales on Wednesday.

Markets will focus on Geithner's remarks to Congress, first on the controversies surrounding the bailout of American International Group Inc. (AIG) Tuesday and on bank regulation on Thursday.

Many also hope that he will elaborate on the Treasury's plans to handle toxic assets, the very same which have plagued banks' balance sheets and the financial system before bringing down the entire global economy.

Fed gets Street cred

Over the past week, the Fed gained back some credibility on Wall Street by announcing Wednesday a surprise move to buy up to $300 billion of Treasury bonds, as well as expanding its purchases of mortgage-backed securities and agency debt.

"The U.S. central bank has officially cranked up the printing presses and will be flooding the financial markets with money," said Kathy Lien, director of currency research at Global Forex Trading.

The bond market surged on the news, sending Treasury yields -- which move inversely to prices -- to their biggest one-day plunge since the stock market crash of 1987.

Treasury yields are used as benchmark for the interest rates on many consumer loans, including for mortgages. Lower bond yields also make Treasury bonds less attractive to investors, leading them to seek more risk, such as turning to stocks.

After the government moves, the dollar plunged, helping boost the price of commodities including oil and gold. and .

Stocks, for a change, reacted positively to the Fed's action. The Dow Jones Industrial Average gained 0.7% for the week. The broad S&P 500 Index rose 1.6% and the Nasdaq Composite Index (RIXF) posted a weekly gain of 1.8%.

For March, the broad market, as measured by the S&P, is up 4.6%.

"[The Fed] ran into credibility issue when it ran out of ways to lower interest rates," with the Fed's official key rates already near zero since last year, according to Banyan's Pavlik. "But now, they came out of the meeting with some newfound respect from the Street."

The actual impact on the economy from the Fed's moves will be the ultimate measure of the central bank's success, he added. In the meantime, most data continue to paint a bleak picture for the economy.

Besides the housing reports next week, Wednesday will bring February data on orders for durable goods, which include some measures of business spending. Thursday brings final figures on fourth-quarter gross domestic production. Friday will bring reports on consumer confidence in March, and personal income in February.

Geithner's test

Ailing financials stocks have managed to rally through March, helped by upbeat comments from Citigroup Inc. and Bank of America Corp. , whose outlook has improved after receiving billions of dollars of government money.

Financial stocks also have found support after the government backed away from the possibility of nationalizing some of the biggest ailing banks -- something that would have wiped out their shareholders.

But Wall Street has remained uneasy with the toxic assets linked to bad home loans still sitting on banks' balance sheets. Some hope Congress will change accounting rules -- so-called mark-to-market rules -- to allow banks to revalue their assets above what the market might assign them.

The Treasury, for its part, launched a program to try and incite private investors to partner with the government in assigning values to the assets and find them buyers.

"But so far, the feeling is that the question of toxic assets hasn't been addressed, and that attracting private capital will be a problem," said Pavlik.

After the Fed's big move last week, the Street will now turn to the Treasury and Geithner to provide more answers.