Stocks Rally to Sharply Higher Close on Softer Fed Tone

Stocks erased nearly all of their losses for the year after investors interpreted comments from the Federal Reserve to mean that an interest rate hike is less likely.

The S&P 500 and the Nasdaq turned positive for the year, erasing all of last month's selloff, while Dow Jones Industrials is still down slightly for the year.

Stocks were powered higher by strength in brokerages and banks, which saw their best performance since July of last year. Financials was the best performing S&P 500 sector, surging more than 2%. Buying was across the board with all of the sectors trading firmly in positive territory. The Dow utilities hit historic highs.

The Dow is now up 337 points, or 2.8%, so far this week, its best three-day performance since June. The average is at its highest level since Feb. 26, the day before the market fell sharply, but still off 0.1% for the year.

The Nasdaq is up 1.7% sor far this year, while the S&P is up 1.2%.

"While the Fed didn't really change its bias, it did look a little less hawkish than in January," Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics, told CNBC.com. "People were looking to see a cut sooner rather than later. We didn't get that but we did get language that dropped the threat of future tightening."

As expected, the Fed kept the overnight lending rate at 5.25% and said it remains more concerned about the risk of inflation than slowing economic growth. Stocks and bonds rallied after the Fed omitted a reference to future tightening, signaling to many investors that the central bank has softened its stance.

"Dovish Statement"

"It's very clear that this was the most dovish statement we've had in some time," said Jim Cramer, host of CNBC's Mad Money. "The bond and stock markets are saying, 'ease.' I'm calling for a May cut."

"On balance I think there was more good than bad in the statement," Arthur Hogan, managing director at Jefferies, told CNBC.com.  "The Fed sort of leaned in the direction that inflation will ease moving forward and that was reassuring.  There was enough balance in the statement to indicate that the Fed is as likely to ease as tighten."

Treasury notes rallied, sending yields lower. The Treasury yield curve turned positive after the Fed decision.

Some analysts, however, urged caution.

"I think the response to the Fed statement has been overdone," Al Goldman, chief market strategist at A.G. Edwards, told CNBC.com.  "They pointed out that inflation is still a problem.  I would preach a little caution short-term, although long-term, I'm still looking for an interest rate cut sometime this summer."

Company News

Alcoa pared losses after it weighed on the Dow in early trading after Prudential Equity Group cut its rating on the aluminum industry and downgraded the company's stock.

And FedEx weighed on the Dow Transports after the company said a slowing economy hurt quarterly earnings and could impact its fiscal 2008 growth target.

Tech stocks were a bright spot throughout the session after software company Oracle reported fiscal third-quarter earnings that topped market expectations after the bell Tuesday. Shares of Oracle rose.

Dow transports heavyweight FedEx reported quarterly profit of $1.35 per diluted share. The package delivery company also said it may not meet its fiscal 2008 growth target.

Broker-dealer Morgan Stanley said first-quarter earnings rose 60% on improved trading and banking results. 

And in the energy market, New York light crude futures were  higher after a buildup in crude oil stocks, but a bullish report for gasoline supplies. European Stocks Finish Mixed

In Europe, London's FTSE-100 and the Frankfurt DAX closed moderately higher, while the Paris CAC-40 closed basically flat.

New details emerged of the potential blockbuster banking deal between Barclays and ABN Amro. If a merger happens the company would be listed in London, the headquarters would be in Amsterdam and the top two jobs will be split between executives at the two companies.

In Germany, retailer Metro fell after it said it sees earnings before interest and tax up 6% to 8% for 2007, shy of market expectations.

And in Spain, clothes retailer Inditex fell. The company reported a 25% rise in 2006 net profit, topping analyst targets, but said it would not meet cost control and sales growth goals until 2008.

China Hits Record High

In Asia, China's main stock index closed at an all-time high thanks to strong performance by real-estate stocks.

Markets in Japan are closed for the Spring Equinox holiday. They will reopen on Thursday.

Australia's S&P/ASX 200 Index shed early gains close lower as investors took a cautious stance ahead of the outcome of the Fed meeting, while a strong Australian dollar hit shares in firms with big U.S. business interests. Mining giant BHP Billiton and fellow global miner Rio Tinto both hung on to gains on stronger metal prices.

In South Korea, the Kospi Index ended marginally lower, erasing early gains, as the firmer won hurt exporters, while disappointed investors booked profits after the benchmark index backed away from resistance at the 1,450 level.

Hong Kong stocks slipped as investors booked profits in China Mobile after its recent run, while China Agri-Industries soared in its listing debut.

Singapore's Straits Times Index rose led by United Overseas Bank and DBS Group after investment bank UBS put out a favorable research report.

© 2009 CNBC.com