Stocks Rise after Bold Fed Move

Indexes finished with strong gains Wednesday after the central bank said it would buy Treasuries and mortgage-backed securities to help boost lending

U.S. stocks closed higher Wednesday after the Federal Reserve announced fresh steps to aid the economy, including buying up to $300 billion of longer-term government bonds. The rally extended gains won in five of the last six sessions. Treasuries also rallied on the Fed news, while the dollar index sank.

Before the Fed announcement, stocks were essentially flat after battling back from losses in the morning. The news jolted equities higher. On Wednesday, the 30-stock Dow Jones industrial average finished higher by 90.88 points, or 1.23%, at 7,486.58. The broad S&P 500 index gained 16.23 points, or 2.09%, to 794.35. The tech-heavy Nasdaq composite index added 29.11 points, or 1.99%, to 1,491.22. NYSE breadth was 25-6 positive, while Nasdaq breadth was 19-8 positive.

The Fed said at the conclusion of its two-day policy meeting that it would boost the size of its balance sheet by purchasing up to $300 billion of longer-term Treasury securities over the next six months to help improve conditions in private credit markets.

The Fed said it would also buy up to an additional $750 billion of agency mortgage-backed securities to bolster mortgage lending and housing markets. The move brings the Fed's total purchases of these securities to up to $1.25 trillion this year. The Fed also said it would increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.

Bond yields plunged as Treasury prices moved higher. The dollar index fell. Gold and oil futures moved higher.

Citigroup (C), MetLife (MET) and other financial stocks posted sharp gains.

The Fed is "throw[ing] the kitchen sink at the recession and the financial market stresses," says Action Economics.

"These are very large numbers," wrote Ethan Harris of Barclays Capital Research. "The Fed is essentially underwriting half of the gross issuance in the MBS market and 30% of the gross issuance in the Treasury market. With the rest of Washington moving in slow motion (and in some cases hindering the revival in capital markets), the Fed continues to move ahead aggressively."

In its post-meeting statement, the Fed said it will "employ all available tools to promote economic recovery and to preserve price stability." The FOMC kept its target range for the federal funds rate at 0 to 0.25% percent and said it expects that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Policymakers noted that the economy continues to contract. "Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession."

The Fed was more pessimistic about the outlook, notes S&P senior economist Beth Ann Bovino, as officials "removed language saying they expected the economy to recover later this year."

Though the near-term economic outlook is "weak", policymakers expect that "policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

The central bank said it expects that inflation will remain subdued. "Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

The Fed said it will "continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments." The decison was unanimous.

Earlier, blue-chips pared losses and the Nasdaq composite index edged into the green following reports the February headline consumer price index rose 0.4%, while core CPI, which excludes food and energy prices, rose 0.2%; and the fourth-quarter current account deficit fell to $132.8 billion from $140.4 billion in the third quarter.

A possible merger involving Possible IBM Corp. (IBM) and Sun Microsystems (JAVA) was also in the spotlight Wednesday.