Stocks End Higher as Fed Holds Steady

The Fed kept rates unchanged and said that the U.S. economy was "leveling out." Bernanke & Co. will also wind down debt purchases

U.S. stocks closed solidly higher Wednesday following the Federal Reserve's decision to leave U.S. interest rates unchanged, suggesting that the economy is on more stable ground. The Fed also said it would slow its plans to buy up to $300 billion of Treasury securities.

Equities held strong gains won prior to the Fed's decision after data showed a widening in the U.S. trade gap and a rise in existing home prices.

Wednesday's stock gains followed two sessions of losses. Financials and techs led the rebound.

On Wednesday, the 30-stock Dow Jones industrial average finished higher by 120.16 points, or 1.30%, at 9,361.61. The broad Standard & Poor's 500-stock index gained 11.46 points, or 1.15%, to 1,005.81. The tech-heavy Nasdaq composite index added 28.99 points, or 1.47%, to 1,998.72.

Treasuries and the dollar fell. Gold and crude oil futures rose.

In the Fed's post-meeting statement released at 2:15 p.m. ET, policymakers said they would maintain the target range for the federal funds rate at 0% to 0.25% and continue to expect economic conditions are likely to warrant "exceptionally low" interest rates for an extended period.

The central bank said that based on recent data, the U.S. economic activity is "leveling out." The Fed added that conditions in financial markets have improved further in recent weeks. It said household spending has continued to show signs of stabilizing but "remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit." Businesses are still cutting back on fixed investment and staffing, noted the Fed, but are "making progress in bringing inventory stocks into better alignment with sales."

"Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability," the Fed said.

As for the Fed's ongoing purchase of government debt, policymakers reiterated the Fed's existing plan to purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. The Fed also reiterated its plan to buy $300 billion of Treasury securities.

But the Fed indicated the debt purchase program will be wound down: "To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October." The Fed said it will continue to evaluate the timing and overall amounts of its purchases of securities "in light of the evolving economic outlook and conditions in financial markets."

The Fed reiterated its subdued outlook on inflation.

The statement concluded: "The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted."

The policy decision was unanimous.

"The Fed's statement was largely in line with expectations with respect to the outlook on growth, inflation, and not extending the size of the purchase programs," says Action Economics.

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