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Stocks jump to record highs after Fed holds steady on stimulus

September 18, 2013|By Andrew Tangel

NEW YORK -- The Federal Reserve's surprise decision to hold steady on its easy-money policies sent major stock indexes climbing about 1% to new all-time highs.

The Dow Jones industrial average surged 147.21 points, or 0.9%, to close at 15,676.94.

The broader Standard & Poor's 500 index added 20.73 points, or 1.2%, to 1,725.49. The technology-focused Nasdaq composite index rose 37.94 points, or 1%, to 3,783.64.

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The Fed's $85 billion a month in bond purchases have helped fuel this year's stock rally, lifting major indexes about 20% for the year as of Wednesday.

But in its decision to hold off on "tapering" the bond-buying stimulus program, the Fed said the economy wasn't yet strong enough to stand on its own.

“It just feels better to investors knowing that the Fed is there," said Larry Palmer, managing director of Morgan Stanley Private Wealth Management in Los Angeles. "It’s almost a false sense of security."

Bonds also rallied. The yield on the benchmark 10-year Treasury bond -- which had been hovering around 3% -- fell sharply after the Fed's announcement. In a 10-minute span Wednesday afternoon, the 10-year yield fell from 2.87% to 2.74%, according to Tradeweb. A bond's price rises as its yield falls.

The Fed's bond purchases, known as quantitative easing, have kept a lid on long-term interest rates to make borrowing cheaper. They also have pushed investors into riskier assets such as stocks, as bonds became less attractive.

“We want to see stock prices go up for the right reasons,” said Jeffrey Cleveland, a senior economist at Payden & Rygel in Los Angeles. "It's a little perverse."

Still, the Fed alone hasn't fueled the rally, Cleveland said.

“The economy is healing slowly," he said. "We are seeing record corporate profits, so the entire rally we’ve seen is not just built on sand."

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