Stocks Give Thumbs Up to Fed

Updated from 4:10 p.m. EDT

Stocks in the U.S. overcame the initial weakness that followed the Federal Reserve's rate cut and closed with substantial gains Wednesday.

The Dow Jones Industrial Average went from up 100 points before the Fed released its comments on rates and the economy all the way into negative territory, but then the rebound began. When the final bell rang, the Dow had a gain of 137.54 points, or 1%, at 13,930.01.

The S&P 500 jumped 18.36 points, or 1.2%, to 1549.38, and the Nasdaq Composite was better by 42.41 points, or 1.51%, at 2859.12.

As had been widely expected, the Federal Open Market Committee, the Fed's policymaking arm, decided to lower the fed funds target rate by 25 basis points to 4.50%. It was only the second rate reduction since June 2003, with the last coming in September.

In an accompanying statement, the Fed said that "the upside risks to inflation roughly balance the downside risks to growth," adding that "recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation."

"The key word is 'balance,' which took the market down [initially]," said Paul Mendelsohn, chief investment strategist with Windham Financial. "They are now in a neutral stance by saying risks are balanced because of inflation. This indicates that unless something major goes wrong with the economy, they are done with rate cuts."

Indeed, traders initially took a dim view of those remarks, but buyers appeared to believe the idea of a neutral economy probably isn't that bad considering the turmoil in the credit and housing markets in recent months.