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Fed sparks big rally on stock markets; Pledges to keep rates low for two more years

The Fed spoke -- and financial markets rallied.

The Dow Jones industrial average surged more than 429 points, its 10th highest point gain in history and the biggest since March 2009. A day earlier, the Dow had its worst point decline since 2008.

The Federal Reserve pledged to keep its key interest rate at its record low of nearly zero through the middle of 2013. The central bank also said that it has discussed "the range of policy tools" to spur the economy.

The central bank's statement means that another of round fiscal stimulus could be on the way as the Fed strives to keep those rates low, said Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management, which has $228 billion in assets under management.

In June, the central bank finished its second round of bond buying, also known as quantitative easing, in hopes of boosting the economy. Bob Doll, chief equity strategist at BlackRock, said the Fed's decision to hold interest rates at a very low rate for two years is "unprecedented" and called it a kind of backdoor quantitative easing.

"Markets are going to do what they would have done if the Fed went out and bought securities," Doll said. "This will push investors back into equities."

He expects stocks to continue to rally because a slowly growing U.S. economy won't harm corporate profits. "Corporate America has demonstrated that it can generate good growth and profits despite a weaker U.S. economy," Doll said.

The Dow rose 429.92 points, or 4 percent, to 11,239.77, a significant turnaround from Monday, when the Dow plunged 634.76 points in the first trading day after Standard & Poor's downgraded the U.S. credit rating one notch from its top AAA to AA .

The S&P 500 rose 53.07, or 4.7 percent, to 1,172.53. The Nasdaq composite index rose 124.83, or 5.3 percent, to 2,482.52.

At first, markets reacted much differently to the Fed's statement. Stocks fell after the Fed's 2:15 p.m. statement. Gold surged to more than $1,774 per ounce. The yield on the 10-year Treasury note briefly touched a record low of 2.03 percent.

As stocks rallied, the yield on the 10-year Treasury note headed up. It was at 2.26 percent late Tuesday. A bond's yield drops when its price rises.

Referring to Fed Chairman Ben Bernanke, Howard Silverblatt, senior index analyst at S&P, called it the "Big Ben turnaround."

The industries that did best Tuesday were the ones that fell the most Monday. Financial stocks in the S&P 500 rose 8.2 percent after falling 10 percent Monday. Materials companies, which rely on a stronger global economy for their profits, rose 5.9 percent.

Only seven of the 500 stocks in the index had declines. All 30 stocks in the Dow rose. Bank of America Corp., which was down more than 20 percent Monday, rose 16.7 percent, the most of any stock in the Dow. Aluminum maker Alcoa Inc. was up 8 percent.

Technology company MEMC Electronic Materials Inc. led the S&P 500 higher, gaining 19.1 percent.

Boosting the stock market isn't one of the Fed's jobs, but that hasn't stopped investors from parsing every word of the statements from the Fed.

The Fed's mandate is keeping prices stable and promoting low unemployment, not boosting stocks. But a stock dive after Fed comments has happened before. On June 3, the stock market suffered a late-day dive when Bernanke spoke in public at a conference. Investors said they were looking for a hint of new plans to spur economic growth. When that didn't come, all three major indexes sank.

After Bernanke outlined the plan for a second round of quantitative easing in August 2010, the S&P 500 index gained 28 percent over eight months. Investors pointed to that rebound as evidence that quantitative easing worked -- and so did Bernanke. This sentiment led some people to believe that if stocks fall too far, the Fed would come to the rescue.

The Fed said in its statement that it expects "a somewhat slower pace of recovery over coming quarters."

Consolidated trading volume was heavy, at 9.2 billion shares. Nearly 12 stocks rose for every one that fell on the New York Stock Exchange.

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