WASHINGTON -- The Federal Reserve has sent its strongest signal of confidence in the U.S. economy since the Great Recession struck six years ago: It's decided the economy is finally strong enough to withstand a slight pullback in the Fed's stimulus.
Yet the Fed also made clear it's hardly withdrawing its support for an economy that remains below full health. Chairman Ben Bernanke stressed that the Fed would still work to keep borrowing rates low to try to spur spending and growth and increase very low inflation.
At his final news conference as chairman before he leaves in January, Bernanke managed a delicate balance: He announced a long-awaited and long-feared pullback in the Fed's stimulus. Yet he did so while convincing investors that the Fed would continue to bolster the economy indefinitely. Wall Street roared its approval.
The Fed said in a statement after its policy meeting ended Wednesday that it will trim its $85 billion a month in bond purchases by $10 billion starting in January. Bernanke said the Fed expects to make "similar moderate" cuts in its purchases if economic gains continue.
At the same time, the Fed strengthened its commitment to record-low short-term rates. It said for the first time that it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 percent. Unemployment is now 7 percent.
The Fed's bond purchases have been intended to drive down long-term borrowing rates by increasing demand for the bonds. The prospect of a lower pace of purchases could mean higher loans rates over time.
Nevertheless, investors seemed elated by the Fed's finding that the economy has steadily strengthened, by its firm commitment to low short-term rates and by the only slight amount by which it's paring its bond purchases.
The Dow Jones industrial average jumped 292.71 points, or nearly 2 percent, to 16,167.97 - another all-time high for the blue-chip index. Shortly before the Fed announcement at 2 p.m., the Dow was up just 47 points.
The broader Standard & Poor's 500 index rose 29.65 points, or 2 percent, to 1,810.65 and the Nasdaq composite rose 46.38 points, or 1 percent, to 4,070.06. All 10 sectors of the S&P 500 ended the day higher, with health care and banking up the most.
Bond prices fluctuated, but by late afternoon the yield on the 10-year Treasury note had barely moved. The yield on the benchmark U.S. 10-year Treasury note fluctuated throughout the day but ended up slightly at 2.89 percent, from 2.84 percent late Tuesday.
The dollar rose against the euro and yen.
"We're really at a point where we're getting to the self sustaining recovery that the Fed has been talking about," Scott Anderson, chief economist of Bank of the West. "It really seems like that's going to come together in 2014."
The Fed's move "eliminates the uncertainty as to whether or when the Fed will taper and will give markets the opportunity to focus on what really matters, which is the economic outlook," said Roberto Perli, a former Fed economist who is now head of monetary policy research at Cornerstone Macro.