Dow Soars 200, S&P Logs Best Close Since 2007

Stocks finished at multi-year highs Thursday, as Wall Street cheered the Federal Reserve's plan to launch another round of quantitative easing to prop up the sluggish economy.

S&P 500

The Dow Jones Industrial Average surged 206.51 points, or 1.55 percent, to close at 13,539.86, with all 30 components posting gains. Bank of America and JPMorgan were the strongest performers on the index.

The S&P 500 rallied 23.43 points, or 1.63 percent, to end at 1,459.99, logging its best close since December 2007. The Nasdaq jumped 41.52 points, or 1.33 percent, to finish at 3,155.83.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, tumbled near 14.

All 10 S&P sectors closed sharply higher, led by materials and financials.

“Don’t fight the central banks—The main worry for the market had been the Europe’s falling apart, but [Draghi’s] telling us that’s not going to happen…and now the Fed is launching QE3, so there’s certainly further room for upside [for stocks],” said John Fox, co-manager of the FAM Value Fund.

The Fed launched another aggressive stimulus program, saying it will buy $40 billion of mortgage debt each month and continue to purchase assets to improve the jobs market. Stocks had been trading flat all morning ahead of the decision announcement.

Meanwhile, the Fed lowered its growth outlook for 2012 at 2 percent from a previous forecast of 2.4 percent in June and said the unemployment rate will remain above 8 percent this year.

But the central bank expects growth to accelerate as much as 3 percent in 2013, up from a previous projection for 2.8 percent. And for 2014, the Fed projected growth between 3 percent and 3.8 percent. (Read More: Three Things Fed Did Today That It's Never Done Before)

At a news conference, Bernanke defended the Fed's QE decision, saying they are not adding to the government budget deficit nor causing runaway inflation.

“In addition to QE3, once news broke that Bernanke upped the GDP for 2013 and 2014, that was basically best of both worlds for equities,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “It’s clear that the global leaders are doing all they can to combat the slow economy…we look forward to a strong year-end rally.”

Meanwhile, small-cap stocks reached a new year high, with the Russell 2000 trading at its highest level since July 2011.

“When you have small-cap leadership, that’s saying overall markets want to break out,” said Detrick.

Financials propelled the rally, with BofA leading the pack. JPMorgan also advanced, wiping out all of the losses incurred following the "whale" trade debacle.

Apple rallied to hit an all-time high of $684.69 a share after the tech giant unveiled its iPhone 5and some new iPods. And analysts seemed to be impressed with the new model—at least nine brokerages boosted their price targets on the company.

Nintendo rose after the Japanese tech firm said it will start selling its new Wii U video game consolewith a touch-pad controller, starting November 18 in the U.S. The basic set will cost $299.99, while the deluxe set will be priced at $349.99.

Citi lowered its rating on chipmakers Intel , AMD and Marvell to "neutral" from "buy," citing a weak August performance in addition to Intel’s recent pre-announcement.

Pier 1 Imports rallied after the furniture retailer raised its full-year guidance as same-store sales and store traffic saw a boost.

On the economic front, jobless claims climbed, hitting the highest in two months, according to the Labor Department. And the producer price index jumped in August, rising by the most in three years, as energy cost soared.

Treasury prices added to gainsafter the government auctioned $13 billion in 30-year bonds at a high yield of 2.896 percent and bid-to-cover of 2.68.

By CNBC’s JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

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FRIDAY: CPI, retail sales, industrial production, consumer sentiment, business inventories, FDA decision on Truvia

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