Wall Street jumps after Fed announces stimulus cut

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks rallied on Wednesday after the Federal Reserve announced a small reduction in its stimulus program but stressed interest rates would stay low for even longer than previously promised.

The move came as surprise to many analysts, with most surveys leading up to the meeting forecasting the Fed would wait until early next year to announce any stimulus reduction.

That the reduction was relatively small was a relief to investors, analysts said, as well as the fact that it removes from the market the uncertainty over when the Fed would start to scale back its bond-buying. The central bank said it would reduce its monthly asset purchases by $10 billion to $75 billion.

 

The move points to better prospects for the economy and labor market and marks a historic turning point for the largest monetary policy experiment ever.

"This is a vote of confidence in the economy and represents the first step toward monetary policy normalization. The forward guidance on rates was dovish, as the Fed endeavors to minimize any negative fallout from the decision to taper," said David Joy, chief market strategist, Ameriprise Financial, Boston.

The central bank said it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the jobless rate falls below 6.5 percent.

The S&P 500 briefly added to losses following the announcement but quickly rebounded and turned positive, with major indexes advancing to session highs. The CBOE Volatility index VIX slumped 11 percent, while nine of the 10 S&P 500 sectors were positive.

The Dow Jones industrial average <.DJI> rose 174.98 points or 1.1 percent, to 16,050.24, the S&P 500 gained 16.6 points or 0.93 percent, to 1,797.6 and the Nasdaq Composite added 16.32 points or 0.41 percent, to 4,040.

Fed Chairman Ben Bernanke began hinting at a reduction in the stimulus back in May. Strong data recently seemed to suggest that the timeline could be pushed up. Still, a survey of fund managers by Bank of America Merrill Lynch released on Tuesday revealed that only 11 percent of those polled expected a taper this week.

Gains in the Nasdaq were limited by Jabil Circuit Inc , which tumbled 20.6 percent to $15.66 a day after forecasting current-quarter results way below Wall Street estimates. The outlook weighed on other companies in the technology space, including Apple Inc , which fell 1.7 percent to $545.96.

Energy companies led the way higher on the Dow and S&P 500 as oil prices gained. Shares of Exxon Mobil XOM.N> were up 2.4 percent at $99.12.

Shares of Lennar Corp rose 5.2 percent to $37.03 after the No. 3 U.S. homebuilder reported a 32 percent jump in fourth-quarter profit. Also, data on Wednesday showed U.S. housing starts surged to the highest in nearly six years in November, a sign of strength in the housing market.

(Additional reporting by Herbert Lash, Ryan Vlastelica; Editing by Nick Zieminski)