By Geoffrey Rogow

Stocks and bonds pared earlier gains but then bounced back following the Federal Reserve's latest policy announcement, which suggested its easy-money stance will continue awhile longer.

The Dow Jones Industrial Average (DJI), up about 114 points prior to the release at 2:15 p.m. Eastern, more recently had posted a 118-point gain, trading up 0.6%, or 9,886.02 The Nasdaq Composite Index (RIXF) was up 0.8 %. The S&P 500 (SPX) was up 1%, helped by gains in every sector.

Following a two-day meeting, the Fed kept its key rate target near zero, as traders had expected. Its policy statement was largely the same as the one issued in late September, though the central bank cut the amount of agency debt that it plans to purchase to $175 billion from $200 billion.

"The Fed is wanting to not rock the boat at the moment and wants to make sure the economy is on very firm footing before any overt attempt is made to raise rates and deal with the inflationary pressures down the road," said Matthew Kaufler, a portfolio manager with Federated Clover Investment Advisors. "As an investor, it means we'll still have a fair amount of liquidity moving around and the market should remain pretty stable if not grind slightly higher in the near term."

Dow and S&P component Merck (MRK) leapt more than 6% after announcing that it expects annual earnings growth in the high-single-digits percentage range until 2013.

Walt Disney (DIS) was also a big winner, up nearly 3% after it got the go-ahead from China to pursue plans to build a theme park in Shanghai.

Treasury prices were lower. The 10-year note fell 15/32 to yield 3.526%. The 30-year bond was off 1-1/32 to yield 4.394%.

The dollar suffered a broad-based decline, trading lower against every major foreign denomination except the Japanese yen. The U.S. Dollar Index slid 0.7%.

Commodity prices drew support from the dollar's weakness. Gold, still viewed by some participants as an alternative to paper currency, climbed nearer the $1,100 mark.

Oil futures trimmed earlier gains, but were trading just above $80 a barrel in recent action following the release of data showing an unexpected drawdown in U.S. reserves of crude. The commodity came into Wednesday's action on a two-day winning streak, up 78.5% on the year.

 
 

Despite crude's recent momentum, some market veterans are skeptical that the gains can continue. "I still kind of feel that we're in the latter stages of this rally," which has come in spite of continued weakness in demand, said Tom Bentz, vice president at BNP Paribas Commodity Futures. "Even though we may try to poke a little higher, I'm not sure we can sustain these numbers."

 
 

Other big-picture economic news on Wednesday was mixed. The Institute for Supply Management said its nonmanufacturing index, a measure of U.S. service-sector activity, moved to 50.6 in October from 50.9 in September. The index was expected to hit 52 in October, but traders were encouraged that the measure is still over 50, a level that indicates growth. Automatic Data Processing and Macroeconomic Advisors reported a 203,000 drop in private-sector jobs last month, as expected by economists and smaller than September's decline. And outplacement firm Challenger, Gray & Christmas said that layoffs announced by U.S. companies in October fell to the lowest reading since March 2008.

Stocks built on the session's earlier gains following the Federal Reserve's latest policy announcement, which suggested an easy-money stance will continue awhile longer.

The Dow Jones Industrial Average, which was up about 114 points prior to the release at 2:15 p.m. Eastern, recently traded 130 points higher, trading above 9900. The Nasdaq Composite Index was up 0.8%. The S&P 500 was up 1.2%, helped by gains in every sector.

Stocks were also taking their cues off the dollar, which has been weakening against the euro since the opening bell.

Merck (MRK) led the Dow gainers, surging after it predicted annual earnings growth in the high-single digits on a percentage basis until 2013.

Shares of Walt Disney (DIS) were up nearly 3% after the company got the go-ahead from China's central government to pursue plans to build a theme park in Shanghai.

Kraft Foods (KFT) was the rare component in the red, down 3.2% after reporting weaker-than-expected third-quarter sales and lowering its outlook for sales growth this year. Also helping blue chips has been the dollar's precipitous slide.

"Going global remains a priority for pension funds and all the rest of our clients as they look to de-risk," said Michael Petroff, a portfolio manager with Heartland Advisors. "It's forced us to broaden the net in terms of the universe we look at and when we look at domestic stocks, you need to look at how much of their performance is affected by the dollar."

Crude oil and gold futures were both rising to new highs, helped by another decline in the dollar.

Gold for December delivery, the most actively traded contract, hit an intraday high of $1,096.2 an ounce in electronic trading on Globex, a record for the contract. It surpassed Tuesday's peak of $1,088.50 an ounce.

Crude for December delivery gained $1.03, or 1.3%, to $80.63 a barrel on the New York Mercantile Exchange. The contract earlier touched an intraday high at $81.10 a barrel..

Treasurys fell, with the 2-year note dropping 2/32 to yield 0.94%, and the 10-year note sliding 8/32 to yield 3.499. Despite crude's recent momentum, some market veterans are skeptical that the gains can continue.

"I still kind of feel that we're in the latter stages of this rally," which has come in spite of continued weakness in demand, said Tom Bentz, vice president at BNP Paribas Commodity Futures. "Even though we may try to poke a little higher, I'm not sure we can sustain these numbers."

Wednesday's early gains in the stock market contrasted with the usual caution seen ahead of a Federal Reserve interest-rate decisions.

But stocks have already been in a slump lately, and Friday's jobs report has become the bigger focus, since the Fed's upcoming statement is expected to include no change in rates and perhaps just a hint as to when they could change.

The Institute for Supply Management reported its nonmanufacturing index moved to 50.6 in October, from 50.9 in September.

The index, which comprises mainly the service sector activities that make up the strong majority of total American economic output, was expected to hit 52.0 in October. But investors were encouraged that the measure is still over 50, a level that indicates growth and describes the breadth of the expansion.

In addition, its new orders and prices indexes both showed growth from September.

Investors also greeted some brighter news on the jobs front. Payroll giant Automatic Data Processing and consultancy Macroeconomic Advisors reported a 203,000 drop in private-sector jobs last month, on par with the drop expected by economists and smaller than September's decline.

Meanwhile, outplacement firm Challenger, Gray & Christmas said the number of layoffs announced by U.S. companies in October fell to the lowest reading since March 2008.

"It fits with the general scheme of recent reports showing the economy is slowly healing," said Bruce Bittles, chief investment strategist at Robert W. Baird. "Nobody expects the economy to boom but as long as it continues to put one foot in front of the other, it's a positive signal for stocks."

Still, economist Bob Eisenbeis, a former senior vice president of the Atlanta Fed, said he didn't think the central bank would change that part of its statement for now. "They're just not going to risk choking off a recovery at this juncture," since investors would quickly take more defensive positions in bonds and stocks at the first hint of Fed tightening, Eisenbeis said.

Among stocks in focus Wednesday, Con-Way fell 10% after the freight-transportation reported third-quarter profit and revenue below analysts' estimates. R.R. Donnelley & Sons (RRD) climbed 4.4%, as the Chicago printing-services company's profit excluding items beat analysts' expectations.

 
 
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