(MoneyWatch) Stocks shot higher asthat it wouldn't begin unwinding its unprecedented stimulus program.
At the close of trading Wednesday, the S&P rose 20 points to 1,725, a gain of 1.2 percent. The Dow climbed 147 points to 15,676, or nearly 1 percent. The Nasdaq composite added nearly 38 points, or just over 1 percent, to 3,783.
Interest rates plunged, and the dollar lost value. Oil surged higher. Gold gained over 4 percent.
Some economists, such as Dean Baker of the Center for Economic and Policy Research, had predicted that the still limping economy would prevent the Fed from taking its foot off the gas. After all, Fed Chairman Bernanke had never guaranteed that policy makers would announce a move to start tapering the central bank's $85 billion a year bond purchase program at its September meeting.
But before this afternoon, most stock market pundits had confidently predicted that tapering would be announced today, and that the stock market wouldn't react negatively if it was. Few had predicted that the Fed would stand pat.
The few market analysts who did think the Fed would wait noted that Bernanke had repeatedly conditioned tapering on sustained economic growth. But the recovery, especially the job market, has cooled since the Fed's last forecast in June.
"We did not see a chance for tapering, because the economy is so lackluster," said Walter Zimmermann, senior technical analyst at investor advisory firm United Icap. "People got themselves into such a lather of fear, thinking, 'Oh my God, what if he pulls the plug?' It became a matter of people listening to their own fears over what Bernanke was actually saying. It was a classic case of a collective hysteria. What he was really saying was, 'When things get better, we're going to taper.' He never said, 'We're ready to taper.' At every opportunity, he said unemployment is still too high and the economy too weak."
The bond buying program is intended to help lower long-term interest rates and spur borrowing and spending. Bernanke said the Fed expects to see economic headwinds through 2015.
Since Bernanke in May laid out to the country what the Fed's criteria was for scaling back on its bond purchases, interest rates on the bellwether 10-year Treasury bond climbed from around 1.6 percent to about 2.9
percent earlier in the day. After the announcement, the yield on the 10-year bond stood at 2.7 percent (bond prices and yields move in inverse directions.)
Zimmermann said he expects the market surge to continue and pressure to remain on interest rates -- barring unexpected shocks such as a government shutdown or a geopolitical event.
"We're still in a minefield," he said. "The market thought it was standing on a mine of tapering, and it wasn't. But there's always something."