United States stocks rallied to record highs on Wednesday after the Federal Reserve surprised investors and decided against trimming its bond-buying stimulus program that helped fuel US stocks’ rally of more than 20 percent this year.
Reuters reported that stocks were modestly lower before the announcement, but after the Fed statement the Dow and S&P 500 indexes quickly climbed to record highs after the central bank said it would continue buying bonds at an $85bn monthly pace for now.
Market participants had largely been expecting the central bank, whose policy-setting committee ended a two-day meeting, 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 Chairman 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 151.52 points or 0.98 per cent, to 15,681.25, the S&P 500 gained 21.15 points or 1.24 per cent, to 1,725.91 and the Nasdaq Composite added 35.199 points or 0.94 per cent, to 3,780.897.
The Fed also lowered its forecasts for economic growth. It now sees growth in a twoper cent to 2.3 per cent range this year, down from 2.3 per cent to 2.6 per cent in its June estimates. The downgrade for next year was even sharper, 2.9 per cent to 3.1 per cent compared with 3.0 per cent to 3.5 per cent.
Separately, a White House official said Federal Reserve Vice Chairwoman 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 versus the euro and gold rallied after the announcement.