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Dow, S&P rise to record close after bank stocks surge on the Fed

  • U.S. central bank announced it will begin in October rolling off its $4.5 trillion balance sheet, most of which consists of the Treasurys and mortgage-backed securities.
  • Following the Fed's announcement, shares of major banks including PNC Financial Services, Bank of America and Citi were all up more than 1 percent.

The S&P 500 and Dow Jones industrial average closed at record highs and bank stocks surged after the Federal Reserve indicated another rate hike this year was possible and that it would begin the unwinding of its balance sheet next month.

The statement was a little more hawkish than traders anticipated, causing the 10-year Treasury yield to jump higher and in turn, boosting financial shares.

The Dow Jones industrial average rose 41.79 points to close at a record 22,412.59 as JPMorgan and Goldman Sachs climbed.

The S&P 500 closed 0.06 percent higher to settle at 2,508.24, a new record. Industrials and materials shares both hit intraday all-time highs in today's session.

Following the Fed's announcement, shares of major banks including PNC Financial Services, Bank of America and Citi were all up more than 1 percent.

The Nasdaq composite fell 0.08 percent to close at 6,456.04 with Apple and Microsoft both lower.

U.S. central bank announced it will begin in October rolling off its $4.5 trillion balance sheet, most of which consists of the Treasurys and mortgage-backed securities it acquired under a program known as quantitative easing.

At the same time, the Fed did not raise its benchmark interest rate from its current 1 percent to 1.25 percent target, however, its updated rate forecast shows that another hike this year is likely.

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"Even before the Dow turned positive the XLF was even higher on the back of the dot plot, suggesting that 12 out of the 16 [voting Fed members] saw a rate hike in December," said Quincy Krobsy, chief market strategist at Prudential Financial. The Financial Select Sector SPDR Fund (XLF) is an exchange traded fund that corresponds to the performance of the financial sector of the S&P 500.

"This is a market knee-jerk reaction. There's a lot of data releases between now and December, and the fed will be monitoring. Remember, the Fed wants to see fiscal policy move and transition from monetary to fiscal," said Krosby.

The SPDR S&P Bank exchange-traded fund (KBE) traded above its 200-day moving average for the first time since Aug. 16 on an intraday basis.

According to the CME Group's FedWatch tool, investors now see a 70 percent chance of a rate increase by the end of December.

The highly-anticipated rollback signaled the central bank's effort to reverse the asset purchases it made as part of the extraordinary quantitative easing program it created to save the economy during and after the financial crisis.

"I think the biggest takeaway is that the Fed's numbers aren't as dovish as the market expected," said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. "All in all, it looks like the Fed is on the same track."

Though investors have been largely skeptical of a third rate hike until recently, price data may give the Fed the support it needs. The Labor Department reported that consumer prices rose 0.4 percent last month, making August's gain the largest in seven months and lifting the year-over-year increase in the CPI to 1.9 percent.

Traders work as a television monitor displays Federal Reserve Chair Janet Yellen announcing the Fed's decision to raise interest rates on the floor of the New York Stock Exchange (NYSE) June 14, 2017 in New York City.
Getty Images
Traders work as a television monitor displays Federal Reserve Chair Janet Yellen announcing the Fed's decision to raise interest rates on the floor of the New York Stock Exchange (NYSE) June 14, 2017 in New York City.

"It was a little bit more of a hawkish announcement than what the market was expecting," explained Erik Schiller, head of developed market interest rates at PGIM Fixed Income. "Inflation expectations could be modestly higher," he explained. Schiller noted the Fed recognized high gasoline prices following Hurricane Harvey could be temporarily affecting the economy.

On the Fed's rate targets known as "dot plots," Schiller said "There's a lot more dispersion, particularly in 2019. It looks like more of a non-consensus."

The targets for appropriate federal funds rates by Federal Open Market Committee participants are plotted in a chart that has come to be known as the "dot plot."

Meanwhile, the yield on the 10-year Treasury note rose to 2.266 percent. While yields have fallen over the past six months, they've posted a modest rebound in September and climbed even higher after the Fed's announcement Wednesday afternoon.

The 2-year Treasury note yield hit a high of 1.451 percent, its highest level since Nov. 2008, when it yielded as high as 1.456 percent. Treasury yields move inversely to their prices.

The U.S. Dollar Index, which measures the greenback against a basket of other global currencies, reversed course to gain 0.73 percent.

Shares of FedEx rose about 2 percent after trading sharply lower in the premarket. The shipping giant said Tuesday it now expects earnings between $11.05 and $11.85 per share, below its previous projection between $12 and $12.80 per share.

The company said it adjusted its outlook to account for the impact of the TNT Express cyberattack, which FedEx said "significantly affected" the worldwide operations of the segment.

"[The] FedEx miss doesn't change long-term outlook," wrote Stifel analyst David Ross in Wednesday's note to clients. "[The cyberattack] did not impact any legacy FedEx operations, and the company will have the old TNT operations back to normal in the next couple of weeks."

CNBC's Gina Francolla contributed to this report.