Fed gives Dow best day of the year

NEW YORK (CNNMoney.com) -- Stocks and bonds rallied Wednesday as investors read the latest Federal Reserve policy statement as implying that the central bank is more likely to cut rates than raise them anytime soon.

The central bank also soothed the market by downplaying the impact of the fallout in the subprime lending sector by not acknowledging it at all, a surprise to some investors.

The Dow Jones industrial average (up 154.70 to 12,442.80, Charts), the Nasdaq (up 47.71 to 2,455.92, Charts) composite and the broader S&P 500 (up 23.88 to 1,434.82, Charts) index all surged, according to early tallies, with the Dow seeing its best one-day point gain of the year. All three major gauges had posted slim gains ahead of the news.

Treasury prices rose, lowering the corresponding yields. The dollar fell versus other major currencies.

Here's a look at what was moving near the close.

Fed policy makers concluded their two-day policy meeting Wednesday by keeping the Fed fund rate, a key overnight bank lending rate, unchanged at 5.25 percent for the sixth meeting in a row, in line with expectations.

In the closely-watched statement, the central bankers changed the language to suggest that they were a bit more worried about the slower economy than previously, noting that "recent indicators have been mixed."

In addition, the statement no longer said "additional firming may be necessary." Investors took this omission as implying that the Fed was more likely to cut rates going forward than raise them.

However, that may not be the case.

"There seems to be an interpretation that they are throwing a bone to the doves, but I don't think that's right," said Michael Darda, chief economist at MKM Partners. "They reiterated that the predominant concern going forward is inflation."

In light of that, Darda said the decision to remove the phrase "additional firming" was stupid, in that it has confused investors, giving them the impression that the bank is less worried about pricing pressure than it is.

The bankers were trying to soften their rate hike or tightening bias, said Stephen Stanley, chief economist at RBS Greenwich Capital, rather than shift toward easing, a significant semantic difference.

"This was a baby step toward symmetry," Stanley said. However the result, judging from the market euphoria, is that the statement has "exacerbated the gap between the Fed's perception of the economy and the bond and stock market perception."

The market reaction also suggest that investors are "not as concerned about inflation as the Fed is," said Georges Yared, chief investment officer at Yared Investment Research.

In addition to the inflation-related language, the central bankers surprised some investors by not referring to the recent fallout in the subprime mortgage lending market, only noting that "the adjustment in the housing sector is ongoing."

However, the economists seemed to think that was a positive, noting that subprime may have less of an impact on the overall economy than the recent stock gyrations would suggest.

Treasury prices did an about face after the Fed announcement, erasing losses and turning higher. The advance sent the yield on the 10-year note down to about 4.53 percent from about 4.58 percent before the meeting and 4.55 percent late Tuesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar gave up gains and turned lower versus the euro and the yen after the announcement.

Among stock movers, 29 out of 30 Dow components rose, with Alcoa the only decliner.

Morgan Stanley (up $5.58 to $81.69, Charts) shares jumped after the bank reported higher earnings that topped estimates.

Oracle (up $0.62 to $18.17, Charts) shares also climbed after the software maker posted quarterly sales and earnings that rose from a year ago. Earnings were released after the close Tuesday.

Also after the close Tuesday, Adobe Systems (up $2.56 to $43.30, Charts) reported higher profits that topped estimates on lower sales that missed forecasts. The stock gained Wednesday morning.

Wednesday morning, FedEx (down $1.33 to $110.96, Charts) reported lower quarterly earnings that topped estimates and issued a 2007 forecast that is short of expectations. Shares slipped. (Full story)

SanDisk (up $1.57 to $43.48, Charts) rose after the flash memory chip maker reached a patent agreement with South Korea's Hynix Semiconductor.

On the downside, U.S. Auto Parts Network (down $4.58 to $6.49, Charts) slumped 44 percent in unusually active trading after reporting a fourth-quarter net loss late Tuesday, down from a profit a year ago. The auto parts retailer also issued a first-quarter and full-year 2007 earnings outlook that is short of forecasts.

Market breadth was positive and volume picked up from the morning. On the New York Stock Exchange, winners topped losers 4 to 1 on volume of 1.31 billion shares. On the Nasdaq, advancers beat decliners 7 to 3 on volume of 1.84 billion shares.

U.S. light crude oil for May delivery rose 1 cent to $59.61 a barrel on the New York Mercantile Exchange, following the release of the weekly oil inventories report.

COMEX gold for May delivery rose $1 to $660 an ounce.

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