U.S. stocks rally to record after Fed announces cuts to stimulus

U.S. stocks rose, sending benchmark indexes to all-time highs, after the Federal Reserve said it will reduce the pace of its monthly bond purchases and expressed confidence in the labor market recovery.

Homebuilders rallied after the Fed said it may hold interest rates near zero even if unemployment falls below the 6.5% rate the central bank previously cited as a likely catalyst for an increase.

The Standard & Poor’s 500 Index (CME:SPH14) added 1.7% to 1,811.07 at 4 p.m. in New York, surpassing its previous record close reached on Dec. 9. The Dow Jones Industrial Average climbed 296.50 points, or 1.9%, to an all-time high of 16,171.76. Both gauges posted their biggest gains in two months.

“It’s confirmation that the Fed thinks the economy is strong enough to justify tapering,” David Lafferty, chief investment strategist for Natixis Global Asset Management in Boston, said in a phone interview from Boston. His firm oversees $783 billion. “I’d contrast that with four or five months, when people were afraid of the taper. Now we had better economic data in the past four to six weeks, people were ready for it and markets have adjusted its expectations.”

The central bank announced plans to cut its monthly bond purchases to $75 billion from $85 billion, taking its first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.

‘Modestly Reduce’

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

The central bank added that it “likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below” the Fed’s 2% goal.

The jobless rate fell to 7% in November, a five-year low, as employers added a greater-than-forecast 203,000 workers to payrolls. Unemployment was down from 10% in October 2009, during the recession, and up from 4.4% in May 2007.

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