NEW YORK (AP) - The Federal Reserve surprised financial markets on Wednesday with a cautious outlook on the economy, pushing stocks and bonds sharply higher.
Investors judged that the tentative tone stuck by the Fed following a two-day meeting meant that interest rates may soon be heading higher, but the pace of any increases will be more moderate than they previously thought.
Policymakers left open the possibility of a rate increase later in the year, but also lowered the central bank's forecast for economic growth and noted that inflation would likely remain low
Stocks swung from losses earlier in the day to big gains after the Fed released its post-meeting statement. Bonds also rallied, pushing the yield on the 10-year Treasury note back below 2 percent. The dollar plunged against the euro.
"There is very little to suggest that the Fed is going to raise rates aggressively this year," said Jeremy Zirin, an investment strategist at UBS Wealth Management.
The Fed has held its benchmark interest rate close to zero since 2008 to help the economy recover from the Great Recession. Low rates make it easier for businesses and consumers to borrow and spend. They have also helped the stock market soar over the past six years, pushing major stock indexes to record levels.
On Wednesday, the Standard & Poor's 500 index rose 25.22 points, or 1.2 percent, to 2,099.50. The index had been down as much as 11 points before the release of the Fed's statement at 2:00 p.m. Eastern time.
The Dow Jones industrial average gained 227.11 points, or 1.3 percent, to 18,076.19. The Nasdaq composite rose 45.39 points, or 0.9 percent, to 4,982.83.
Energy companies led the gains for stocks as the price of oil spiked after the Fed's statement. Lower rates tend to make oil and other hard assets more attractive investments, increasing their prices. The energy sector in the S&P 500 jumped 2.9 percent.
Benchmark U.S. crude rose $1.20 to close at $44.66 a barrel in New York.
The Fed's statement confirmed that stocks remain in a "Goldilocks" environment, where growth is solid, but not strong enough to stoke inflation, said Zirin at UBS.
"This still seems to be the sweet spot for equity investors, where you should see decent, but unspectacular earnings gains," he said.
In currency trading, the dollar slumped, reversing a recent surge against the euro.
The U.S. currency weakened almost 3 percent against the euro, to $1.0894. The dollar had traded as low as $1.05 earlier in the week. The dollar also declined against Japan's currency, to 120.09 yen from 121.34 yen late Tuesday.
The dollar has surged in recent months as traders anticipated that the Fed would start raising interest rates this year, even as policymakers in Europe and other parts of the world are still stimulating their economies.
That surge has crimped earnings for big multinational companies, such as Oracle, Procter & Gamble and Coca-Cola, which rely on overseas sales for a large portion of their revenue. About half of all sales by S&P 500 companies are made overseas.
Bond investors also took the Fed's statement as a buying signal, and U.S. government bond prices jumped.
On Wednesday, the Fed downgraded its quarterly economic forecasts. It cut its estimate of growth this year to a range of 2.3 percent to 2.7 percent, from an estimate of 2.6 percent to 2.7 percent in its last forecast issued in December. It was an acknowledgement that some key indicators have been weaker than expected in recent months.
Michael Arone, chief investment strategist for State Street Global Advisors, said the Fed's view of the economy was now closer to that of stock and bonds investors. They had worried that the central bank would raise rates too quickly, given signs that the economy is still wavering in its recovery.
Although the hiring picture in the U.S. has improved in recent months, other indicators have been weaker.
A report Monday showed that output at U.S. factories fell for a third straight month in February, driven by a big drop in production at auto plants. Retail sales have also remained sluggish despite a big drop in gas prices that has put more money in consumers' pockets.
"The Fed and the market have gotten a whole lot closer together," said Arone.
The yield on the 10-year Treasury note fell to 1.92 percent from 2.08 percent on Tuesday, a sharp move lower.
In energy markets, Brent crude, a benchmark for international oils used by many U.S. refineries, rose $2.40 to close at $55.91 a barrel in London. Wholesale gasoline rose 6.9 cents to close at $1.799 a gallon. Heating oil fell 7.9 cent to close at $1.773 a gallon. Natural gas rose 6.5 cents to close at $2.920 per 1,000 cubic feet.
Metals were mixed. Gold rose $3.10, or 0.3 percent, to $1,151.30 an ounce. Silver fell four cents, or 0.2 percent, to $15.54 an ounce. Copper dropped 6 cents, or 2.4 percent, to $2.57 a pound.