Stocks rally as Fed takes stimulus steps to boost economy

Stocks rallied on Thursday after the Federal Reserve took an aggressive and expensive move to protect the U.S. economy.

The Dow Jones Industrial Average gained 206.51 points to 13,539.86. The blue chip index is now less than 4.5 percent away from the all-time high set on Oct. 9, 2007.

The Nasdaq Composite Index rose 41.51 points to 3,155.83, and the S&P 500 Stock Index was up 23.43 points to 1,459.99.

The Fed agreed to a third round of quantitative easing, a move to spend $40 billion on mortgage-backed securities, which should extend low interest rates until at least 2015. The move is designed to stimulate consumer and business spending to stimulate the economy.

The action also raised commodity prices. Gold rose to a seven-month high, up $38.40 to $1,772.10 an ounce. Oil was up $1.30 to $98.31 a barrel.

“It was a very powerful statement,” said Kevin Caron, a market strategist at Stifel Nicolaus & Co. in Florham Park, N.J. The firm oversees about $127 billion. “The Fed is going all in here, especially with their commitment to continue asset purchases until they see the desired result in the form of a lower unemployment rate. This statement removes a lot of uncertainty about the Fed’s commitment to maintaining price stability.”

“What the market didn’t expect was having this labor market kicker,” said John Canally, an economist and investment strategist at LPL Financial Corp. in Boston. The firm oversees about $350 billion. “The Fed said if the labor market doesn’t improve, the committee will continue. That was a little bit of a bolder step than the market would have thought and what is adding to the risk-on trade here.”

Data Thursday showed the number of Americans filing applications for unemployment benefits rose more than projected last week, indicating scant improvement on the outlook for jobs. Wholesale prices in the United States increased in August by the most in more than three years, reflecting a surge in energy costs.

Two rounds of large-scale asset purchases totaling $2.3 trillion have failed to reduce the jobless rate below 8 percent more than three years into the recovery. In a speech to central bankers and economists on Aug. 31, Fed Chairman Ben Bernanke said, “The stagnation of the labor market in particular is a grave concern.”

The S&P 500 is about 7 percent away from reaching its record closing high from 2007 after rallying 16 percent this year. The equities index has climbed in the past three months amid expectations that central banks will take steps to stimulate the economy. The European Central Bank last week announced a bond-buying program.

All 30 stocks in the Dow rallied, and all 10 groups in the S&P 500 rose at least 1 percent, led by financial and commodity shares.

Bank of America Corp. (NYSE: BAC), the second-largest U.S. bank by assets, increased 4.8 percent to $9.40. JPMorgan Chase & Co. (NYSE: JPM) added 3.7 percent to $41.40. Shares of the New York-based lender have erased their decline since Chief Executive Officer Jamie Dimon disclosed a $2 billion trading loss in May. Class A shares of Berkshire Hathaway Inc. (NYSE: BRK.A) jumped 2.1 percent to $132,851, the highest since October 2008.