Stocks surge after Fed decision to scale back stimulus

NEW YORK -- Stocks rallied nearly 2% after the Federal Reserve announced it would begin scaling back its stimulus program early next year.

The Dow Jones industrial average added 292.71, gaining 1.8% to 16,167.97 at the closing bell Wednesday. The broader Standard & Poor's 500 index rose 29.65 points, or 1.7%, to 1,810.65.

The late-day rally pushed the Dow and S&P 500 to new all-time closing highs, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. 

The technology-focused Nasdaq composite rose 46.38 points, or 1.2%, to 4,070.06.

Live blog: Fed starts taper

Wall Street has been obsessed over how long the Fed would continue its easy-money policies that have helped boost this year's stock rally.

“The market sees it as the right thing to do,” said J.J. Kinahan, chief strategist at TD Ameritrade. “It views it as a vote of confidence that the [economy] is as healthy as the numbers have been portraying it."

By buying $85 billion in bonds every month, the Fed has tried to lower borrowing costs for consumers and businesses as a way to stimulate economic growth.

The Fed said Wednesday it would scale back its stimulus to $75 billion a month, citing the economy's growing strength.

“We had to taper at some point,” said John Rutledge, chief investment strategist at Safanad in New York. "Ten billion a month is a good start.”

Starting in January, the Fed said, the central bank would start buying $35 billion a month in mortgage-backed securities, and $40 billion a month of long-term Treasury bonds.

With interest rates lower, investors have searched for higher returns in riskier assets such as stocks. That has helped pushed up the Dow nearly 22% since Jan. 1.

Professional investors had fretted over the Fed's eventual pull-back, but investors were heartened to hear the Fed would only begin to taper moderately.

Key for the central bank's policymakers will be whether labor, growth and inflation data show the U.S. economy can stand on its own.

The Fed's move landed on Wall Street as a "mild surprise," Kinahan said. Investors were comforted to hear Fed Chairman Ben Bernanke say the central bank stood ready to continue supporting the economy as needed.

“It’s like a baby going from crawling to walking," Kinahan said. "See how those few steps go before you walk away.”

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