New York - US stocks rallied to record highs on Wednesday after the Federal Reserve, in a surprise to markets, decided against scaling back a stimulus programme that has helped fuel Wall Street's rally of more than 20% this year.
Stocks were lower before the announcement, but after the Fed announced it would continue buying bonds at an $85bn monthly pace for now, the Dow and S&P 500 indexes quickly climbed to all-time highs.
While equities jumped on the Fed's decision, questions remained how long the rally would last as the central bank expressed concerns about the economy's future growth with likely budget and debt limit battles in Washington to come.
Market participants had largely been expecting the central bank, after a two-day meeting of its policy-setting committee, to begin a withdrawal of the bond-buying programme by about $10bn a month.
"No taper, the market loves it. We will see if that lasts but boy, we are off to the races," said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.
"From a short-term stock market perspective it can be seen as a good thing because the market likes to see continued Fed stimulus. From a real economy standpoint, what it says is the Fed is actually more nervous about the economy than is generally perceived."
In a news conference following the announcement, Fed chairperson Ben Bernanke said the plan is to maintain a highly accommodative policy, with the central bank looking to see if its basic outlook for the economy is confirmed. Only then would the US central bank take the first step to remove the stimulus.
The Dow Jones industrial average rose 147.21 points to 15 676.94, the S&P 500 gained 20.76 points to 1 725.52 and the Nasdaq Composite added 37.942 points to 3 783.641.
The S&P's previous closing high was 1 709.67 and the Dow's was 15 658.36, both on August 2.
About 580 stocks on the NYSE and Nasdaq hit new 52-week highs on Wednesday. About 325 of them hit their highs after the Fed announcement. Priceline.com hit an intraday high of $1001, the first S&P 500 company in history to reach that landmark level. Shares in the online travel agency closed up 2.6% at $995.09.
The Fed also lowered its forecasts for economic growth. It now sees growth in a 2% to 2.3% range this year, down from 2.3% to 2.6% in its June estimates. The downgrade for next year was even sharper, 2.9% to 3.1% compared with 3.0% to 3.5%.
Separately, a White House official said Federal Reserve vice chairperson Janet Yellen was the front runner to take over the top job at the US central bank when Bernanke's term ends in January, the strongest indication yet of her likely nomination.
Materials stocks rallied as the US dollar fell to a seven-month low and gold rallied after the announcement. Newmont Mining surged 8.2% to $30.87 and the S&P materials index gained 2.3%.
Homebuilder stocks also jumped on expectations the Fed's stimulus would put downward pressure on mortgage rates and provide a boost to the housing market recovery. Lennar advanced 6.5% to $37.33 and DR Horton jumped 6.9% to $21.33. The PHLX housing index gained 4.3%.
"People are clearly surprised and the thinking now is the Fed is going to make sure the economy is on even sounder footing before they start backing off on these purchases," said Doug Foreman, co-chief investment officer at Kayne Anderson Rudnick Investment Management in Los Angeles.
"This is unequivocally good for interest-rate sensitive stocks, which had been bracing for impact for several months now."
Looking beyond the Fed, market participants had an eye on the looming budget and debt limit debates in Washington. The White House said on Wednesday the latest Republican proposal moves away from compromise.
Volume was heavy with about 7.39 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, well above the daily average of 6.24 billion.
Advancing stocks outnumbered declining ones on the NYSE by 2 620 to 428, while on the Nasdaq, advancers beat decliners 1 620 to 903.