U.S. stocks sharply higher after Fed trims stimulus

NEW YORK - Investors sent stock soaring and pushed the Dow Jones industrial average up more than 200 points Wednesday afternoon after the Federal Reserve decided to dial back its extraordinary economic stimulus. The central bank cited a stronger jobs market and improving economy.

Investors have been anxious for months about whether the economy was strong enough to grow without the Fed. The stock market's afternoon surge answered the question.

The Dow jumped 238 points, or 1.5 percent, to 16,113 as of 3:17 p.m. ET. Shortly before the Fed announcement at 2 p.m., it was up just 47 points.

The Standard & Poor's 500 index was up 24 points, or 1.4 percent, to 1,805 and the Nasdaq composite rose 31 points, or 0.8 percent, to 4,055.

"Investors should see this as a vote of confidence for the economy," said Kristina Hooper, head of U.S. investment strategies for Allianz Global Investors

Starting in January, the Fed will reduce its bond-buying program to $75 billion a month from $85 billion now.

The pullback will be the first step toward winding down a crucial stimulus program that has been in place, in one form or another, since the financial crisis.

By purchasing bonds and depressing their yields, the Fed has encouraged borrowing and lending, but also led investors to shift money into stocks.

That has given the Fed a big role in the current bull market. The S&P 500 index has surged about 26 percent since the Fed announced a year ago that it would buy the $85 billion in bonds each month. And since the central bank's first round of bond buying at the end of 2008, stocks have soared about 124 percent.

As a result, stock investors have anxiously awaiting a pullback since the spring, when Fed Chairman Ben Bernanke first hinted the Fed could start reducing the purchases.

How on edge have markets been? The only two months of declines this year occurred in June and August, when the Fed appeared poised to cut back.

But in the last month, as signs emerged of that hiring was picking up, the housing market was improving and manufacturing was strengthening, investors appeared to grow more confident that the economy could gain traction without the Fed.

The Fed also said Wednesday it is likely to keep cutting its bond purchases. Bernanke, who is nearing the end of his term, said the bank will likely vote for "measured reductions" in purchases in upcoming meetings, as long as the economy data continues to show an improving economy.

Bernanke also said Janet Yellen, who becomes Fed chairwoman once she is confirmed by the Senate, "fully supports" the bank's decision to start reducing stimulus.

The decision was a surprise to the market, as most strategists and economists expected the Fed to wait until March before pulling back. But investors say it is a welcome surprise.

"We finally have something in motion, and we have details on how it's going to work, so it's something the market can embrace," said Frank Davis, director of trading at LEK Securities.

Markets are also reacting to good news on the housing front. Builders broke ground on homes at the fastest pace in more than five years and 23 percent more than in October, the Commerce Department says. Permits for single-family homes rose, indicating that builders are increasingly confident in the market.

The homebuilder Lennar surprised Wall Street by reporting a 32 percent profit increase. The stock climbed $2.30, or 7 percent, to $37.50.

In other news:

- Micron Technology fell $1.83, or 8 percent, to $21.09 on concerns that the company could face increased competition from overseas. Micron dragged other technology stocks lower, particularly memory storage companies Western Digital, Seagate Technology and SanDisk.

- Ford slumped $1.18, or 7 percent, to $15.52 after the company issued a three-year profit forecast that came in short of investors' expectations. The company cited a large number of vehicle launches in 2014 as well as weakness in overseas markets. General Motors slipped $1.56, or 4 percent, to $39.97.