Stocks rally, end higher as Fed stands pat on rates

U.S. stocks rallied after the Federal Reserve left interest rates unchanged and signaled more gradual increases.

The Dow Jones industrial average finished up about 74 points, or 0.4%. The Standard & Poor's 500 gained 0.6% and the Nasdaq composite ended up 0.8%.

Wall Street had expected the Fed to keep rates unchanged, but wanted clues as to the timing of the Fed's next rate increase. The Fed lowered its plan to two more hikes this year, down from four, for a total increase of 50 basis points, which is much more aligned with Wall Street analysts' expectations.

Fed stands pat on rates; signals more gradual hikes

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Stocks, which had been almost unchanged just before the central bank's policy statement at 2 p.m. ET, initially jumped on the announcement before settling back, and then rallied again after Fed Chair Janet Yellen started her face-off with reporters at 2:30 p.m. ET.

The Dow has finished higher eight of the past 10 sessions and has inched within 1% from where it ended 2015. Stocks, of course, have been in rally mode since mid-February, driven in part by shrinking recession fears, rebounding oil prices and a belief that the Fed will not be as aggressive with rate hikes as originally believed following early-year financial market turbulence and slowing growth abroad.

Stocks around the globe were also trading conservatively. Shares of the broad Stoxx Europe 600 were up less than 0.1%. In Asia, Japan's Nikkei 225 closed down 0.8% and Hong Kong's Hang Seng index dipped 0.2%. The Shanghai composite in mainland China finished 0.2% higher.

Ron Sanchez, chief investment officer at Fiduciary Trust Company International, a wealth management unit of Franklin Templeton, says Wednesday's Fed meeting outcome is key for markets.

"(Today), is Fed day and as always it is an important day," Sanchez told USA TODAY. "Given all the dynamics and backdrop heading into the meeting today is even more important. Wall Street would like to have clarity in terms of forward guidance (or the Fed's rate-hike timetable). Our view is no March hike and they won’t move until mid-year. I think the Fed will defer or push out (rate hikes) and reassess at mid year and see if the economy is strong enough to support Fed tightening."

When it comes to how the stock market might react, Sanchez says any hint of a rate hike as early as April would be a negative for the market, as it would run counter to the Fed's recent message that they will be patient in normalizing rates.

"An April move would not constitute patience, and (would run counter) to the Fed saying it is not on a predetermined path," just one month after it held off on hiking rates, Sanchez explained. "Market participants are looking for the Fed to keep them to their word. The data has not justified another hike."

Given that other central banks around the globe, such as the Bank of Japan and European Central Bank, are still providing more stimulus to their economies, a Fed pause would make sense here to avoid a further tightening of financial conditions in the U.S., adds Sanchez.

Clues of a rate hike at future meetings include things such as the Fed leaving unchanged its so-called dot plot, or its forecast of how many rate hikes it expects in 2016. Back in December the Fed's dot plot showed four rate hikes of a quarter point, or one per quarter adding up to a full percentage point for the year. Wall Street, at one point earlier this year, had taken all rate hikes off the table, but are now expecting one or two hikes in 2016.

The Fed at its January meeting also did not cite whether it viewed the risk to its outlook to the downside or balanced. If it says risks are now balanced that would be an upgrade of its outlook and signal more rate hikes are coming. The Fed's new economic outlook and fresh views on inflation will also be closely watched.

Adam Shell on Twitter: @adamshell.