GLOBAL MARKETS-Stocks soar, bond yields fall after Fed surprise
* Wall Street hits new highs as Fed keeps stimulus intact Fed decision not to taper bond buying surprises market
* Bond yields drop as Fed maintains purchases, U.S. dollar drops
NEW YORK, Sept 18 (Reuters) - Stocks and gold jumped while the U.S. dollar and bond yields fell sharply on Wednesday after the Federal Reserve surprised investors by postponing the start of the wind down of its massive monetary stimulus, saying it wanted to wait for more evidence of solid economic growth. The U.S. benchmark S&P 500 stock index closed at a record high and the dollar fell to a seven-month low against the euro after the Fed released its statement at 2 p.m. EDT (1800 GMT). The dollar fell 1.0 percent against the yen. Markets were widely expecting the Fed to reduce its $85-billion-per-month asset-buying scheme by at least $10 billion after comments by Fed chairman Bernanke in May and June suggested a reduction in bond purchases was likely late this year. The Fed said it would await evidence of stronger economic growth before adjusting the pace of its purchases, and in a press conference, Federal Reserve Chairman Ben Bernanke said market expectations cannot dictate policy actions. "The initial reaction was positive, with people thinking, 'Here we go, more liquidity in the market.' That's a good thing as far as being an ongoing tailwind," said David Joy, chief market strategist at Ameriprise Financial in Boston, where he helps oversee $703 billion in assets under management. "But the decision also means the economy isn't as strong as we'd like, which has implications for corporate earnings down the road." Benchmark 10-year U.S. Treasury notes gained more than a full point, up 1 12/32 in price to yield 2.68 percent, down from 2.86 percent before the statement. Gold posted its largest one-day gain since June 2012, rising more than 4.0 percent to $1,364.26 an ounce, rebounding off a six-week low set earlier in the day. The Fed downgraded its economic forecasts for the U.S. economy. It now sees growth in a 2.0 percent to 2.3 percent range this year, down from 2.3 percent to 2.6 percent in its June estimates. The downgrade for 2014 was even sharper.
"The Federal Reserve remains quite concerned about the overall sluggishness of the economy, preferring to take the risk of being too loose for too long as opposed to tighten prematurely," said Mohamed El-Erian, co-chief investment officer at Pimco, which manages the world's largest mutual fund. The Dow Jones industrial average was up 115.28 points, or 0.74 percent, at 15,645.01. The Standard & Poor's 500 Index was up 15.60 points, or 0.92 percent, at 1,720.36. The Nasdaq Composite Index was up 25.59 points, or 0.68 percent, at 3,771.29. Latin American markets reacted positively to the Fed's move on Wednesday, with stocks reversing losses seen in emerging markets over the summer. The MSCI Latin American stock index rose 2.7 percent to 3,428.45 following the announcement, after having spent most of the session with little changes. Asian shares traded in the U.S. also rose. The BNYMellonAsia ADR Index rose 2.6 percent to hit highs not seen since June 2008. "In the near-term it's obviously bullish for emerging market assets," said Neil Shearing, chief emerging markets economist with Capital Economics in London. "That will be the theme for the next day or so as markets begin to adjust to expectations for a more gradual pace of tightening." Investors were now left to wonder about the sustainability of Wednesday's rally in stocks and bonds. The Fed had engendered a sharp rise in bond yields in the past three months largely through its own words that forced investors to adjust forecasts. Whether equity markets can continue to rally on a statement that underlines concerns about the economy is unclear. The U.S. dollar index fell as low as 80.376, the lowest since Feb. 20. It was last at 80.481, down 0.8 percent. The euro climbed to a seven-month peak of $1.3486. It last changed hands at $1.3469, up 0.8 percent. Against the yen, the dollar fell to 97.98 yen, a three-week low and by mid-afternoon trading, it was down 0.8 percent at 98.35.