Stocks staged a late-afternoon rally after the Federal Reserve signaled that the outlook for inflation has improved while the economy continues to grow at a moderate pace.
The Dow Jones Industrial Average surged almost 100 points. The S&P 500 ended at a new six-year high while the Nasdaq also rose.
For the month of January, all three indexes finished the month in positive territory. The Dow is up 1.27% year-to-date, while the S&P rose 1.41% for the Nasdaq 2.01%.
The central bank said Wednesday afternoon that the readings on core inflation have "improved modestly" in recent months with pressures "likely to moderate over time.
"The Fed seemed less concerned about inflation than most people had figured," said UBS' director of floor operations Arthur Cashin, to CNBC.com.
Mark Jordahl, chief investment officer at First American Funds, said on CNBC's "Closing Bell" that investors were encouraged by the Fed's positive comments in the areas which have created the most concern among investors, namely housing and inflation.
"It's a Great Day"
"It's a great day, it's what we would hoped would happen throughout the course of this year," Jordahl said. "Decent economic growth, low inflation, low interest rates, that's nirvana for investors."
Short-term interest rates were kept unchanged at 5.25%. The Fed said recent indicators showed "somewhat firmer economic growth" with early signs of stabilization in the housing market.
U.S. government bonds rallied on the Fed news.
"Inflation pressures continue to recede and the Fed is making a note of that, which is very encouraging, said John Miller, bond portfolio manager at Nuveen Investments. "We don't expect the Fed to need to raise rates in 2007, it looks like a soft landing is in place."
Although Wall Street widely expected the Fed to maintain interest rates for the fifth straight meeting, many investors were worried the central bank's statement would increase the odds of a future rate hike, particularly in light of strong economic data recently released.
"The Fed maintained their bias toward restraint, but they didn't overstate it. This implication is 'steady as she goes'," said Hugh Johnson, chief investment officer at Johnson Illington Advisors, in an interview with CNBC.com.
Boeing Stock Rises
Dow component Boeing said its fourth-quarter net earnings more than doubled, beating market expectations. Earnings rose to $1.29 a share, compared with the 98 cents a share that analysts surveyed by Thomson Financial were expecting. The aerospace company also raised its 2007 earnings a share guidance. Boeing logged the largest daily gain of the 30 companies in the Dow.
Eli Lilly reported a sharply lower fourth-quarter net income, citing hefty charges and higher expenses. However, excluding these items, the pharmaceutical company's profit outpaced analysts' expectations.
Time Warner profit jumped 34% in the fourth quarter, boosted by the sale of Internet access businesses in Europe and a deal that added new subscribers to its cable TV unit.
Ford Motor said it expects January U.S. sales to drop 20% due to lower fleet sales.
New York light crude futures reversed earlier declines in a volatile session that has taken futures back and forth the flatline.
The Energy Department said crude oil inventories rose by 2.7 million barrels last week and gasoline supplies rose by 3.8 million barrels. Distillates, which include home heating oil, dropped by 2.6 million barrels. Even though crude supplies were expected to build, the data sent initially sent oil futures downward.
The New York Stock Exchange and the Tokyo Stock Exchange are embarking on an alliance that could lead the two largest financial markets in the world to an eventual combination. The agreement would allow both exchanges to cooperate on joint developments, such as financial products, mutual listings and technology.
European Stocks Close Mostly Lower; Asia Mostly Lower
In Frankfurt, the DAX rose slightly, while the Paris CAC-40 and London’s FTSE-100 declined.
The Nikkei 225 Average finished lower as Sony and TDK declined after both firms failed to meet investors' expectations when they raised their profit forecasts.
South Korea's Kospi Index ended down, dogged by its worst month since a global sell-off in May, as power provider KEPCO and transportation firms dropped after an oil price surge raised worries about fuel costs.
In Australia, the S&P/ASX 200 Index closed lower, pulling back from all-time highs as
investors locked in recent strong gains ahead of next month's reporting season.
Hong Kong stocks fell sharply and Singapore's Straits Times Index rose.