Stocks Give Thumbs Up to Fed

"Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time," the statement read.

The central bank also reduced the discount rate by 25 basis points to 5%. It was the third cut to the discount rate, or the interest rate charged to banks that want to borrow, since mid-August.

Most analysts agree that the next data point, which comes later this week in the nonfarm payrolls report, will be important in judging officials' future moves.

"Friday's job report is now the next key number," added Mendelsohn. "Barring any major problem on Friday, it would indicate that growth is not slowing as fast as we think and the market can keep its upward bias."

Peter Cardillo, chief market economist with Avalon Partners, said the Fed sent "a loud message" that they sacrificed containing inflation in lieu of economic activity. "Energy continues to rise and the dollar has been falling, and the market has been ignoring that," he said. "The Fed realizes that somewhere along the line that's going to mean inflation."

In light of the Fed's renewed concerns over inflationary pressures, record crude prices appeared worse than before. The December crude contract crossed $94 a barrel for the first time, finishing with a gain of $4.15 at $94.53 a barrel.