U.S. stocks closed sharply higher on Wednesday after the Federal Reserve kept interest rates unchanged but hinted at the possibility of one rate hike later this year.
"The Federal Reserve did what we thought they should've done, which was nothing. The data were not supportive of a rate hike," said Phil Orlando, chief equity strategist at Federated Investors. "So when the Fed said no rate hike'; the data does not support it, you saw a knee-jerk rally that the Fed got it right for once."
The Dow Jones industrial average closed about 160 points higher after the announcement, with Boeing contributing the most gains. The index had briefly dipped in negative territory ahead of the Fed's announcement.
"It was basically what I expected," said Peter Cardillo, chief market economist at First Standard Financial. "I think the real question over the next several weeks, as we get the next batch of data, will be whether December will be a rate hike of 50 basis points."
The S&P 500 gained 1.1 percent, with energy leading advancers. The Nasdaq composite hit a fresh all-time intraday high, and closed at a new all-time high as the iShares Nasdaq Biotechnology ETF (IBB) gained 0.62 percent. Both indexes had briefly turned negative before the announcement.
"The markets liked what they saw, and there wasn't much reason for them not to," said Chuck Self, CIO of iSectors. "The sectors that benefit from low rates have done well" since the announcement. The S&P's real estate sector turned positive after trading more than 1 percent lower.
"Going into the meeting, we knew three things. First, the data had gotten a little mixed," said Daniela Mardarovici, portfolio manager of the BMO TCH Core Plus Bond Fund. "Second, the Fed doesn't like to raise rates without the market expecting it. Third, there is an election right around the corner."
"We do think the Fed wants to normalize, ... but three months is a very long time and the data the Fed looks at is facing a lot of headwinds," she said.
Fed officials lowered their expectations for rate hikes in the years ahead Wednesday but teed up a likely move before the end of 2016. "The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives," the Fed's policymaking committee said in a statement.
"It was pretty much a done deal that we weren't going to get a rate hike today. This meeting has really been about setting the stage for a December hike and what happens after that. The fact that three voters dissented is interesting, and it is pretty clear from the dots that the Fed plan on hiking in December this year as things stand," Luke Bartholomew, investment manager at Aberdeen Asset Management, said in an email after the announcement. "A December hike is by no means inevitable though. We've been in the situation before where the Fed has aligned their guns only to balk at the last minute."
"On the face of it, it was a subdued outcome," said Robert Tipp, chief investment strategist at Prudential Fixed Income. "But there were three dissenters; that's a lot. That's a statement that there's a lot of pressure on the Fed to raise interest rates."
U.S. Treasurys were mixed, with the two-year note yield near 0.77 percent and the benchmark 10-year note yield holding around 1.65 percent. The dollar fell against a basket of currencies, with the euro near $1.118 and the around 100.5.
"While the equity market enjoys the Fed's hold on a rate move, the two year yield has moved a touch higher suggesting that a December rate hike is in sight, said Quincy Krosby, market strategist at Prudential Financial. In the Fed's language, 'near term risks to the economic outlook appear roughly balanced.' This is about as close as you can get towards a commitment to a December hike."
About 15 minutes before the announcement, the Dow traded 13 points higher, with Chevron contributing the most gains. The S&P had risen 0.12 percent, with energy rising more than 1 percent to lead advancers. The Nasdaq was up just 0.05 percent.
"Our short-term indicators continue to support the pullback, with room for volatility to expand. Fortunately, breadth has gotten oversold enough to suggest a breach of support would be short-lived. We would be seeking buy-the-dip candidates to add exposure to once short-term momentum improves," said Katie Stockton, chief technical strategist at BTIG.
The Fed was largely expected to keep interest rates unchanged. According to the Royal Bank of Scotland, market expectations for a rate hike Wednesday were 22 percent.
But Iman Brivanlou, managing director at TCW, said ahead of the announcement that, while the odds of the Fed moving were low, "the BOJ acting increases the possibility of the Fed moving."
"Given the Fed seems to care most about economic conditions, first and foremost, and getting the market's permission to raise interest rates, ... I think market expectations may be too low," he said. "Even though we're not at highs, we haven't sold off drastically."
Dow Jones industrial average intraday
"I believe Lael Brainard's dovish speech a week ago Monday clinched no rate hike today as one has to go back to Wayne Angell's tenure in the early 1990's to have a rate hike with a Federal Reserve Governor dissenting," said Peter Boockvar, chief market analyst at The Lindsey Group, before the announcement's release. "If Lael agrees to a rate hike today after what she said last Monday would be quite an about face and an embarrassing one. We'll get an updated dot plot today but that has been rendered worthless information."
There are no major economic data due Wednesday other than the Fed's announcement.
"Out of deference to wobbly macro data, which include soft headline and Non-manufacturing ISM readings, and one of the wackiest Presidential Elections on record, the FOMC should wait until the last possible moment before acting to lessen the probability of making an error," said Jeremy Klein, chief market strategist at FBN Securities.
U.S. futures rose on Wednesday, tracking global equities, after the Bank of Japan revamped its monetary policy approach. Among the changes, the BOJ said it would make yield-curve control a centerpiece of its new policy framework.
It also said it would buy 10-year Japan government bonds (JGBs) so that the yield would hover around zero percent while keeping a lid on short-term rates.
"The market finds what the Bank of Japan said as positive. Although, for the past few days, we've opened higher and then finished not quite as well," said Bruce McCain, chief investment strategist at Key Private Bank. "The optimism that was driving the market earlier in the summer has faded."
"Now, with that momentum having faded, you need to see fundamentals come through," he said.
European and Asian equities rose on the heels of the BOJ's announcement.
Meanwhile, in oil markets, U.S. crude rose 2.39 percent to settle at $45.34 per barrel after the Energy Information Administration said U.S. oil inventories fell by 6.2 million barrels.
The Dow Jones industrial average gained 163.74 points, or 0.90 percent, to close at 18,293.7, with Boeing leading advancers and Procter & Gamble the biggest laggard.
The rose 23.36 points, or 1.09 percent, to end at 2,163.12, with energy leading all 11 sectors higher.
The Nasdaq advanced 53.83 points, or 1.03 percent, to close at 5,295.18.
About five stocks advanced for every decliner at the New York Stock Exchange, with an exchange volume of 880.62 million and a composite volume of 3.589 billion at the close
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.2, about 17.4 percent lower.
Gold futures for December delivery settled $13.30 higher at $1,335 per ounce.
—CNBC's Leslie Shaffer and Jeff Cox contributed to this report.
On tap this week:
*Planner subject to change.
Earnings: Red Hat, Bed Bath & Beyond
Earnings: AutoZone, Rite Aid
8:30 a.m. Initial claims
9 a.m. FHFA home prices
10 a.m. Existing home sales
10 a.m. Leading index
Earnings: Finish Line
9:45 a.m. Manufacturing PMI
12 p.m. Philadelphia Fed President Patrick Harker, Atlanta Fed President Dennis Lockhart and Cleveland Fed President Loretta Mester on reinventing communities, transforming economies
12:30 p.m. Dallas Fed President Rob Kaplan speaks at energy forum