Stocks closed slightly higher on Wednesday after the Federal Reserve indicated it will likely not raise rates in 2020, removing the fear among investors that it would repeat a mistake it made last year by tightening monetary policy prematurely and knocking the stock market.
The Fed kept interest rates unchanged on Wednesday, following three decreases in a row. The central bank also indicated it does not expect any policy changes through at least 2020.
"The Fed is saying they will leave rates unchanged all year next year, and that means the 10-year Treasury yield will stick so close to the 1.75% Fed funds rate target that you could put a strobe light on it and it would still look like it wasn't moving," said Chris Rupkey, chief financial economist at MUFG, in a note.
Treasury yields fell broadly. The benchmark 10-year rate slid to 1.781% while the 2-year yield fell to 1.611%.
Fed Chair Jerome Powell said in a news conference the central bank would have to see a persistent rise in inflation before hiking rates once again. The Fed had to cut rates multiple times this year to make up for raising rates too far at the end of 2018, a move that slowed the economy and caused stock prices to drop.
"In order to move rates up, I would want to see inflation that's persistent and that's significant," he said. "A significant move up in inflation that's also persistent before raising rates to address inflation concerns. That's my view."
United Technologies and Disney lifted the Dow, rising at least 1% each. Apple also contributed to the gains, gaining 0.9%. Home Depot was the biggest Dow loser, falling 1.8% after issuing a disappointing sales-growth outlook. Tech was the best-performing S&P 500 sector, rising 0.7%, along with materials and industrials.
Powell also said standing operations to stabilize the overnight lending markets are unlikely to have implications at the macroeconomic level.
Back in October, the Fed announced it would extend overnight funding operations through at least January and buy Treasury bills through next year's second quarter. Those moves were announced after a disturbance in the short-term lending market back in September.
Wednesday's announcement follows the recent release of strong economic data. U.S. jobs grew by 266,000 in November, easily topping a Dow Jones estimate of 187,000. U.S. consumer prices rose by 0.3% last month, also beating expectations. Economists polled by Reuters expected an increase of 0.2%.
"At the margin, the employment report is likely to reinforce the Fed's message that the policy rate will remain steady for the foreseeable future, barring future trade policy shocks," said Prajakta Bhide, strategist at MRB Partners. "Unless the trade policy environment worsens meaningfully, we expect that Fed policy will likely remain on hold until after the elections next November."
Wall Street also kept an eye on the trade front as there continues to be no clear indication that the U.S. and China will reach an agreement over trade that could stop or reduce the current level of tariffs. The U.S. is due to impose fresh duties on Chinese goods by Sunday.
The Wall Street Journal reported Tuesday that the U.S. plans to delay these additional tariffs on Beijing as both sides try to work out an agreement. However, also on Tuesday, White House economic advisor Larry Kudlow said the Dec. 15 deadline is still "on the table."
—CNBC's Silvia Amaro and Patti Domm contributed to this report.