Stock markets jolted higher amid news that the U.S. Federal Reserve has decided to trim its monthly bond purchases of financial assets starting in January, with investors finding reassurance in the central bank's pledge not to raise its trend-setting interest rate anytime soon.
Policy makers said in a statement at the end of a two-day meeting that they would decrease their purchases of financial assets by $10-billion (U.S.) a month starting in January, the first change since the extraordinary and controversial stimulus program was introduced 15 months ago.
Trading was volatile. In the first few moments of trading after the decision, stocks started heading south before quickly recovering. Just ahead of the 4 p.m. (ET) market close, they were at their highest point of the session. The Dow Jones industrial average was up 267 points, or 1.6 per cent, at 16,143, nearing its record high of 16,174.51 hit on Nov. 29.
The S&P 500 was up 28 points, or 1.5 per cent, at 1,809. The S&P/TSX composite index was up 171 points, or 1.3 per cent, at 13,351.
The U.S. 10-year Treasury note initially plummeted on the news, with the yield rising to near 2.94 per cent. It has since retreated to the 2.89 per cent level, nearly unchanged for the day. Gold rose, with the active February futures contract in New York up 0.5 per cent.
The loonie weakened on the news to 93.69 cents U.S., compared to near 94 cents prior to the Fed announcement.
"I think people were prepared for this, and I think they are relieved that the Fed is starting. No one wanted this 800-pound gorilla in the market," Wayne Kaufman, chief market analyst at Rockwell Securities in New York, told Reuters.
While many had expected the program to continue at its previous pace into next year, the Fed had said it would begin to slow it when certain economic indicators met its targets. Strong data recently seemed to suggest that the timeline could be pushed up. Still, a survey of fund managers by Bank of America Merrill Lynch released on Tuesday revealed that only 11 per cent of those polled expected a taper this week.
Perhaps providing some comfort to investors was the Fed sounding upbeat on the U.S. economy, predicting it will continue to grow without the additional stimulus. The central bank raised its growth outlook for 2014, forecasting the world's largest economy could grow as much as 3.2 per cent next year. In September, the Fed forecast gross domestic product would grow no more than 3.1 per cent in 2014.
The Fed also went to some pains to assure financial markets that short-term interest rates aren't going up any time soon. It says it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 per cent.
"Investors are looking past the taper and looking at the strength of the economy that is perceived with this news," Chris Gaffney, senior market strategist at EverBank, told CNBC.com. "The Fed did a great job telegraphing it to the markets, as stocks are moving in the opposite direction than you'd think."
With files from Reuters
Darcy Keith