U.S. stocks closed sharply higher on Wednesday as investors cheered the Federal Reserve's statement that indicated a rate hike would come later rather than sooner. (Tweet this)
The Fed dropped the word "patient" from its March meeting statement , a subtle indication that the era of zero interest rates is about to end.
However, the U.S. central bank came off as mostly dovish as the Federal Open Market Committee lowered its December rate outlook by about 50 basis points.
"That's what the market is getting most excited about," said Ashwin Bulchandani, chief risk officer and market strategist at MatlinPatterson. The Fed "came down to the market."
Doug Cote, chief market strategist at Voya Investment Management, had expected the Fed to balance its removal of "patient" from its statement by lowering its rate forecast, following a similar decrease in December.
"It looks like a dramatic cut," he said, following the release of the Fed's dot plot that showed the median rate increase expectations fell from 1.125 percent to about 0.60 percent.
Read More Dovish Fed whipsaws markets
U.S. stocks quickly reversed losses following the news, with the Dow Jones industrial average recovering a 150-point loss to climb more than 240 points higher and hold above 18,000 in the close.
The index had ten triple-digit closes in the last two weeks, with half up and half down.
"The Fed was... far more dovish than what the market was looking for and that's why we rallied," said Krishna Memani, chief investment officer at Oppenheimer Funds. "What we focus (now) on is forward growth and forward inflation expectations."
The Nasdaq briefly hit 5,000 again for the first time since it closed above that psychologically key level earlier this month. The S&P 500 also briefly topped 2,100.
The Russell 2000 closed at a new high.
"I think (the Fed) has been an overhang we've put behind us," said Art Hogan chief market strategist at Wunderlich Securities. It will be "constructive for markets."
Dan Heckman, senior fixed income strategist at US Bank Wealth Management, still expects a rate hike this year. "Barring any dramatic change the Fed said they will raise rates this year (and they) don't want to lose credibility," he said.
The Fed funds futures indicated a shift in the probability of a rate hike to October from September, according to CME Group data.
In a press conference following the statement's release, Fed Chair Janet Yellen said she is not ruling out a rate hike after April and that the timing of a raise is data dependent.
"Overall there's no huge surprise but the market has rallied on (the fact that) the Fed has more flexibility. They don't have to be impatient," said Myles Clouston, senior director with Nasdaq Advisory Services. "From what we're hearing there still seems to be a high degree of agreement (that a rate hike will) likely be in the September timeframe."
"I think today provided a lot of comfort in the near-mid term," he said. "It settled the market down a bit."
The U.S. 2-year Treasury note yield plunged to trade near 0.55 percent following the news. The 10-year yield fell to 1.93 percent.
The U.S. dollar had its worst daily drop since March 18, 2009, with the euro climbing above $1.09.
The CBOE Volatility Index (VIX) (^VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to trade below 14 after the Fed announcement.
Check out CNBC's full coverage on the Federal Reserve's announcement here .
Crude oil futures settled up $1.46 at $46.65 a barrel on the New York Mercantile Exchange. Gold futures settled up $3.10 or $1,151.30 an ounce.
Oil initially extended losses following the U.S. Energy Information Administration report that oil inventories rose 9.6 million barrels. Crude traded above $42 a barrel and Brent crept above $54 a barrel in early afternoon trade.
"In the near term it's easy to read (strong dollar, low oil) as a negative," said Maris Ogg, president of Tower Bridge Advisors. "I think we're going to waffle around until we see some uncertainty resolve."
In more housing news, weekly mortgage applications fell 3.9 percent despite the drop in interest rates, the Mortgage Bankers Association reported.
Starbucks (SBUX) announced a 2-for-1 stock split , with shareholders as of March 30 to get one additional share for each one they have. The change is the first split since October 2005 and the sixth one overall.
FedEx (FDX) posted earnings that beat on revenue that was slightly below estimates. The company's full-year guidance was also slightly lower than expected, but its commentary was generally upbeat and analysts have pointed out that FedEx guidance tends to be on the conservative side.
General Mills (GIS) reported adjusted quarterly profit of 70 cents per share, 3 cents above estimates, with revenue also beating Street consensus. The cereal maker and food producer said it expects to continue "strong growth" during the current quarter.
Last week, Skyworks Solutions replaced PetSmart in the index on BC Partner's acquisition of the pet supplies retailer.
In Europe, stocks closed mixed as investors awaited the outcome of the Fed's meeting. The FTSE rallied on an increased economic growth forecast of 2.3 percent for the United Kingdom, as finance minister George Osborne also signaled plans to scale back austerity measures-just in time for May's national election.
In the software market:
Oracle (ORCL)-The business software maker reported in-line quarterly profit of an adjusted 68 cents per share, although revenue fell below Street estimates. Oracle also raised its quarterly dividend by 25 percent to 15 cents per share.
Adobe Systems (ADBE)-The software firm reported an adjusted quarterly profit of 44 cents per share, beating estimates by 5 cents, while revenue was slightly above forecasts. Adobe did see a less-than-expected increase in subscribers to its Adobe Cloud service, although that was still 28 percent above a year ago.
Microsoft (MSFT)-A blog post by Microsoft EVP Terry Myerson said Windows 10 will be available to consumers "this summer."
The S&P 500 (^GSPC) closed up 25.14 points, or 1.21 percent, at 2,099.42, with energy leading all 10 sectors higher.
The Nasdaq (^IXIC) closed up 45.39 points, or 0.92 percent, at 4,982.83.
Five shares advanced for every decliner on the New York Stock Exchange, with an exchange volume of 807 million and a composite volume of 4 billion in the close.
High-frequency trading accounted for 47.5 percent of daily trading volume, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.
U.S. stocks closed mostly lower on Tuesday as investors focused on the outcome of the Fed meeting. The Dow was off triple digits and only the Nasdaq was in the black.
As of Tuesday's close:
The Dow Jones industrial average was within half a standard deviation above its 50-day moving average. Since 1981 the index has been in this position 4.66 percent of all trading days, according to quantitative analytics tool Kensho. The probability of the index moving lower is 46.6 percent and the probability of it moving higher in the days following is 53.4 percent.
The S&P 500 was within half a standard deviation above its 50-day moving average. Since 1980 the index has been in this position 5.23 percent of all trading days, according to Kensho. The probability of the index moving higher in the days following is 51.3 percent and the probability of it moving lower is 48.7 percent.
The Nasdaq composite was within 1.5 standard deviations above its 50-day moving average. Since 1980 the index has been in this position 7.41 percent of all trading days, according to Kensho. The probability of the index moving lower is 61.9 percent and the probability of it moving higher is 38.1 percent.
-CNBC.com ontributed to this report.
Disclosure: CNBC's parent NBCUniversal is a minority investor in Kensho.
On tap this week:
Earnings: Williams-Sonoma, Herman Miller, Guess, Renren, Silver Wheaton, Jabil Circuit
Earnings: Nike, Lennar, Vince Holding
8:30 am: Initial claims
8:30 am: Current account Q4
10:00 am: Philadelphia Fed survey
Earnings: KB Home, Darden Restaurants, Tiffany
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