U.S. stocks closed higher Wednesday after the Federal Reserve announced fresh steps to aid the economy, including buying up to $300 billion of longer-term government bonds. The rally extended gains won in five of the last six sessions. Treasuries also rallied on the Fed news, while the dollar index sank.

Before the Fed announcement, stocks were essentially flat after battling back from losses in the morning. The news jolted equities higher. On Wednesday, the 30-stock Dow Jones industrial average finished higher by 90.88 points, or 1.23%, at 7,486.58. The broad S&P 500 index gained 16.23 points, or 2.09%, to 794.35. The tech-heavy Nasdaq composite index added 29.11 points, or 1.99%, to 1,491.22. NYSE breadth was 25-6 positive, while Nasdaq breadth was 19-8 positive.

The Fed said at the conclusion of its two-day policy meeting that it would boost the size of its balance sheet by purchasing up to $300 billion of longer-term Treasury securities over the next six months to help improve conditions in private credit markets.

The Fed said it would also buy up to an additional $750 billion of agency mortgage-backed securities to bolster mortgage lending and housing markets. The move brings the Fed's total purchases of these securities to up to $1.25 trillion this year. The Fed also said it would increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.

Bond yields plunged as Treasury prices moved higher. The dollar index fell. Gold and oil futures moved higher.

Citigroup (C), MetLife (MET) and other financial stocks posted sharp gains.

The Fed is "throw[ing] the kitchen sink at the recession and the financial market stresses," says Action Economics.

"These are very large numbers," wrote Ethan Harris of Barclays Capital Research. "The Fed is essentially underwriting half of the gross issuance in the MBS market and 30% of the gross issuance in the Treasury market. With the rest of Washington moving in slow motion (and in some cases hindering the revival in capital markets), the Fed continues to move ahead aggressively."

In its post-meeting statement, the Fed said it will "employ all available tools to promote economic recovery and to preserve price stability." The FOMC kept its target range for the federal funds rate at 0 to 0.25% percent and said it expects that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Policymakers noted that the economy continues to contract. "Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession."

The Fed was more pessimistic about the outlook, notes S&P senior economist Beth Ann Bovino, as officials "removed language saying they expected the economy to recover later this year."

Though the near-term economic outlook is "weak", policymakers expect that "policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

The central bank said it expects that inflation will remain subdued. "Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

The Fed said it will "continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments." The decison was unanimous.

Earlier, blue-chips pared losses and the Nasdaq composite index edged into the green following reports the February headline consumer price index rose 0.4%, while core CPI, which excludes food and energy prices, rose 0.2%; and the fourth-quarter current account deficit fell to $132.8 billion from $140.4 billion in the third quarter.

A possible merger involving Possible IBM Corp. (IBM) and Sun Microsystems (JAVA) was also in the spotlight Wednesday.

AIG's (AIG) Chairman Edward Liddy told Congress he's asked executives to give back some of their bonuses. Liddy acknowledged the company's multimillion-dollar bonuses were "distasteful" to many and had provoked a firestorm of wrath. "I share that anger," Liddy, in his written remarks, said, "Mistakes were made at AIG on a scale few could have every imagined possible." But, he also said that the roughly $165 million in bonuses paid out over the weekend should be honored as a legal commitment of the United States government, which now owns 80% of the battered insurer."When you owe someone money, you pay that money back," Liddy maintained. "We at AIG want to believe that we are all in this together," said the man named six months ago to take over the company as part of the government rescue.

AIG shares gained 43% Wednesday.

The White House and Treasury have been besieged by questions about why Treasury Secretary Timothy F. Geithner did not know sooner about the bonus payments due this month, and whether he could have done more to stop them, prompting White House officials to assert President Obama's continued confidence in Geithner.

Larry Summers, National Economic Council director, said the Obama administration will be "creative" in dealing with the issue of bonuses paid to American International Group employees but said the law must be respected. Summers, interviewed on CNBC television, also said the White House is seeking a method for dealing with failed institutions that has been missing in the current financial crisis. "We are going to be pushing very hard for a so-called resolution regime, a system that will enable the government to intervene when a big financial company gets in trouble in the future like the FDIC (Federal Deposit Insurance Corp.) does with banks and ....make the people who should bear the responsibility bear the responsibility," he said.

China's government rejected Coca-Cola's (KO) $2.4 billion bid to acquire one of China's largest juice makers, saying the deal -- which would have been the largest-ever foreign takeover of a Chinese company -- would unduly restrict competition. The decision by the Ministry of Commerce was the first major test of the country's strengthened anti-monopoly law and could have a chilling effect on merger-and-acquisition activity in China, as well as on foreign investment in the country generally. It could also complicate efforts by China's own companies to make overseas acquisitions.

Former U.S. Treasury Secretary Henry Paulson called for an overhaul of financial regulation in an article in the Financial Times, largely reiterating a plan he proposed in March 2008. Reuters said the Paulson's article comes amid expectations his successor, Treasury Secretary Timothy Geithner, will reveal within days a plan to set up a so-called systemic risk regulator to monitor and manage risk in the financial sector. No single agency now has this role.

In economic news Wednesday, U.S. CPI rose 0.4% in February, while the core rate rose 0.2%, following increases of 0.3% and 0.2%, respectively, in January. Energy prices were up 3.3%, a second straight monthly increase (1.7% in January), after having been sliding lower since August. Gas prices rose 8.3%. The housing index was flat for a third consecutive month, while the owner's equivalent rent measure edged up 0.1%. Food and beverage prices declined 0.1%. Apparel prices rose 1.3%. Medical care costs edged up 0.3% and recreation rose 0.4%. Tobacco prices climbed another 0.7%, after a 0.8% increase in January, keeping pressure on the core rate. The data are about as expected and shouldn't have much impact on the markets.

The U.S. current account deficit narrowed sharply to -$132.8 billion in the fourth quarter, vs. a downwardly revised -$181.3 billion in the third (from -$174.1 billion) and -$182.2 billion in the second quarter (revised from -$180.9 billion) last year. The balance on goods and services was -$140.4 billion, vs. -$180.9 billion (revised from -$176.5 billion). The balance on income rose to $36.5 billion from a revised $29.6 billion (was $30.8 billion). Unilateral transfers rose to -$28.9 billion from a revised -$30.0 billion (was -$28.4 billion).

"The steep narrowing in the deficit is a function of the collapse in trade due to the recession, as well as the firmer dollar," says Action Economics.

France's economy could shrink by 1% in the first quarter, putting into question the government's forecasts for 2009, a French newspaper said on Wednesday, quoting a source close to Economy Minister Christine Lagarde.

The U.K. Office for National Statistics said initial jobless claims rose by 138,400 in February, after an upwardly revised increase of 93,500 in January. That was well above analysts' forecasts for a rise of 85,000 and the biggest increase since comparable records began in 1971. The claimant count rate hit 4.3%, the highest since 1999. Meanwhile, Britain's financial regulator will publish a blueprint for a shake-up of global banking regulation aimed at preventing a recurrence of the crisis that has wounded banks and deepened economic recession.

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