US STOCKS-Dow, S&P hit record highs as Fed keeps stimulus intact
* Fed to continue to purchase $85 billion in bonds a month
* Decision surprises most investors, who expected a $10 billion cut
* Housing, materials stocks jump
* Indexes up: Dow 0.98 pct, S&P 500 1.24 pct, Nasdaq 0.94 pct
NEW YORK, Sept 18 (Reuters) - U.S. stocks rallied to record highs on Wednesday after the Federal Reserve surprised investors and decided against trimming its bond-buying stimulus program that helped fuel Wall Street's rally of more than 20 percent this year.
Stocks were modestly lower before the announcement, but after the Fed statement the Dow and S&P 500 indexes quickly climbed to record highs after the central bank said it would continue buying bonds at an $85 billion monthly pace for now.
Market participants had largely been expecting the central bank, whose policy-setting committee ended a two-day meeting, to begin a withdrawal of the bond-buying program by about $10 billion a month.
"No taper, the market loves it. We will see if that lasts but boy, we are off to the races," said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.
"From a short-term stock market perspective it can be seen as a good thing because the market likes to see continued Fed stimulus. From a real economy standpoint, what it says is the Fed is actually more nervous about the economy than is generally perceived."
In a news conference following the announcement, Fed Chairman Ben Bernanke said the plan is to maintain a highly accommodative policy, with the central bank looking to see if its basic outlook for the economy is confirmed. Only then would the U.S. central bank take the first step to remove the stimulus.
The Dow Jones industrial average rose 151.52 points or 0.98 percent, to 15,681.25, the S&P 500 gained 21.15 points or 1.24 percent, to 1,725.91 and the Nasdaq Composite added 35.199 points or 0.94 percent, to 3,780.897.
The Fed also lowered its forecasts for economic growth. It now sees growth in a 2 percent to 2.3 percent range this year, down from 2.3 percent to 2.6 percent in its June estimates. The downgrade for next year was even sharper, 2.9 percent to 3.1 percent compared with 3.0 percent to 3.5 percent.
Separately, a White House official said Federal Reserve Vice Chairwoman Janet Yellen was the front runner to take over the top job at the U.S. central bank when Bernanke's term ends in January, the strongest indication yet of her likely nomination.
Materials stocks rallied as the U.S. dollar fell to a seven-month low versus the euro and gold rallied after the announcement. Newmont Mining Corp jumped 6.7 percent to $30.43 and the S&P materials index gained 2.1 percent.
Homebuilder stocks also jumped on expectations the Fed's stimulus would put downward pressure on mortgage rates and provide a boost to the housing market recovery. Lennar Corp advanced 5.7 percent to $37.04 and PulteGroup Inc rose 4.9 percent to $17.84. The PHLX housing index gained 3.5 percent.
Looking beyond the Fed, market participants had an eye on the looming budget and debt limit debates in Washington. The White House said Wednesday the latest Republican proposal moves away from compromise.