Stocks ripped higher to close near their best levels Wednesday, with the Dow and S&P 500 setting fresh highs, after the Federal Reserve surprised Wall Street by keeping its $85 billion-a-month bond-buying program intact.
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"This has been music to the market's ears and a positive for risk assets across the board," said Quincy Krosby, market strategist at Prudential Financial. "But investors at some point will start to question the strength of the underlying economy...The chairman also did indirectly point to fiscal policy and no doubt he's following events in DC and the headline drama playing out on the budget debates so that could also have been a reason he decided to hold off now."
Major U.S. Indexes
The Dow Jones Industrial Average soared 147.21 points, or 0.95 percent, to end at 15,676.94, lifted by Alcoa and Home Depot. The blue-chip index set a fresh intraday-high of 15,709.58.
The spiked 20.76 points, or 1.22 percent, to close at 1,725.52, after hitting an all-time high of 1,729.44. Both indexes posted their best day since June 13.
The Nasdaq rallied 37.94 points, or 1.01 percent, to finish at 3,783.64.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell near 13.
All key S&P sectors closed in positive territory, propelled by materials and utilities.
The Federal Reserve said it would continue buying bonds at the current rate of $85-billion a month for now, surprising Wall Street. Strategists and traders were expecting the central bank to announce a $10-$15 billion reduction to its asset purchase program.
"The overall consensus was this was going to be the meeting where they started tapering—and to the extent that the Fed said they're data-dependent, I think they did the right thing," said Art Hogan, managing director at Lazard Capital Markets. "Meanwhile, the market's going to celebrate a more dovish Fed in the near term, but this may not be good news in the medium term."
The Fed also downgraded its outlook for the economy. The central bank now expects gross domestic product growth will be in the 2 percent to 2.3 percent range this year, down from 2.3 percent to 2.6 percent forecast earlier this year. It also cut the 2014 forecast to 2.9 percent to 3.1 percent from 3.0 percent to 3.5 percent.
(Read more: Taper: What Wall Street's favorite buzzword means)
Treasury yields slid, with the Benchmark 10-year yield at 2.76 percent, down from 2.86 before the Fed statement.
Homebuilders rallied sharply following the announcement. KBHome and Ryland Group surged more than 5 percent each.
Apple climbed as first reviews of the new iPhones released overnight showed mostly positive reactions for the 5C and 5S. In addition, the tech giant's redesigned iOS 7 mobile-operating system will be available Wednesday as an upgrade for older iPhones and iPads.
(Read more: Apple's silence on iPhone 5C pre-orders)
BlackBerry declined after the Wall Street Journal reported that the troubled smartphone maker is preparing to lay off up to 40 percent of its staff by the end of the year, citing people familiar with the matter. Earlier, the company unveiled its new Z30 phone, in an effort to compete with the likes of Apple's new iPhone 5S and Samsung's Galaxy S4.
Shares of online travel website Priceline.com hit $1,000 for the first time.
Among earnings, FedEx rallied after the package delivery company posted quarterly results that edged above expectations. Rival UPS also ticked higher.
General Mills posted lower quarterly earnings, but shares of the cereal maker rose after the company said sales rose thanks to the addition of new businesses.
Adobe Systems reported disappointing quarterly earnings and revenue. However, shares of the software maker jumped to lead the S&P 500 gainers following news that it is seeing strong demand for its Creative Cloud service.
Enterprise software maker Oracle is slated to post earnings after the closing bell.
Caterpillar was downgraded by Baird Equity Research to "neutral" form "outperform." The brokerage pointed out that the company's 2014 growth prospects are likely "subdued."
Meanwhile, President Barack Obama said Washington is stuck in a stalemate over budgets, debt and healthcare costs, leaving government unable to function properly, speaking at a gathering of CEOs.
(Read more: Next up for themarket? Government shutdown!)
On the economic front, housing starts rose less than expected, increasing 0.9 percent to a seasonally adjusted annual rate of 891,000 units in August, according to the Commerce Department. July's starts were revised down to show a 883,000-unit pace instead of the previously reported 896,000 units. Economists polled by Reuters expected a reading of 917,000 units.
The Mortgage Bankers Association said home loan applications rose 11.2 percent, after slumping 13.5 percent last week.
(Read more: Curious to see how the 'new' Dow would be performing?)
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
THURSDAY: Jobless claims, current account, existing home sales, Philadelphia Fed survey, leading indicators, natural gas inventories, Fed's Pianalto speaks, Fed balance sheet/money supply, Microsoft analyst mtg, Nike shareholder mtg, weekly rail numbers; Earnings from ConAgra, Rite Aid
FRIDAY: Fed's George speaks, Fed's Bullard speaks, Fed's Kocherlakota speaks, quadruple witching, new iPhones in stores
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