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Stocks rally 1% after Fed announces decision to scale back stimulus

December 18, 2013|By Andrew Tangel
  • Trader Kevin Lodewick works on the floor of the New York Stock Exchange.
Trader Kevin Lodewick works on the floor of the New York Stock Exchange. (Richard Drew / Associated…)

NEW YORK -- Stocks initially rallied on Wall Street after the Federal Reserve announced Wednesday it would begin scaling back its stimulus program early next year.

The Dow Jones industrial average added 200.1 points, or 1.3%, to 16,075.36, about an hour before the closing bell. 

The broader Standard & Poor's 500 index gained 19.24 points, or 1.1%, to 1,800.24. The technology-focused Nasdaq composite rose 20.92 points, or 0.5%, to 4,044.60.

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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.

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 growth. 

“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.

In reaction to the news, bond prices fell, pushing up yields. The yield on the benchmark 10-year Treasury bond rose to 2.855%, up from 2.836% on Tuesday.

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