Fed effect: Dow gains 227, 10-year yield below 2%

Adam Shell and Jane Onyanga-Omara | USA TODAY

Show Caption Hide Caption Stock market bulls fear rate hikes Today, the Federal Reserve may signal that higher rates are coming soon. The Fed last hiked short-term rates in June 2006 – that’s 9 years ago.

U.S. stocks rallied sharply after the Federal Reserve ruled out interest rate hikes at next month's meeting and said it had not "decided on the timing" of the first rate increase in nearly nine years.

The Dow Jones industrial average ended up 227 points, a gain of 1.3%, shooting past the 18,000 mark to settle at 18,076.19. The Nasdaq composite touched the 5000 threshold before retreating a tad, still ending up 0.9% to 4982.83.

Gaining 1.2% was the S&P 500, which settled at 2099.50.

The yield on the 10-year Treasury plummeted from 2.05% at the end of the day Tuesday to 1.92%.

Stocks were lower ahead of the Fed's announcement Wednesday afternoon, but rose sharply after the highly anticipated policy statement was released at 2 p.m. ET at the end of its two-day meeting.

In a statement, the Fed, as expected, did drop its promise to be "patient" as it weighs interest rate hikes, clearing a path for an eventual increase later this year. Still, the stock market reacted bullishly to the Fed's suggestion that rate hikes were not baked in for June, either, as feared, which potentially pushes out the first rate hike even later in the year.

At the start of her face-off with reporters at 2:30 p.m. ET, Yellen, in her opening statement, soothed Wall Street's frayed nerves by stating: "Just because we removed the word 'patient,' doesn't mean we will be impatient."

She added that removing the key word — which had been a promise of sorts not to raise rates for at least two meetings — also "doesn't necessarily mean an increase (in rates) will occur in June." Wall Street had feared that the Fed could move as early as June.

Prior to the Fed announcement, the Dow Jones industrial average was down 90 points, or 0.5%. But it rallied sharply after the Fed news. The blue-chip stock gauge was up 230 points to 18,079 — a 320-point swing to the upside — at the end of Yellen's press conference around 3:25 p.m. ET.

The Standard & Poor's 500 index also rallied and was 1.4% higher after the news, and the tech-heavy Nasdaq composite was up 1.2% on the day, and briefly back above the key 5000 mark, after being down 0.3% before the Fed news.

Markets clearly are rallying on the belief that the Fed will continue to keep rates lower for longer. Low rates, of course, have been a key driver of the bull market in stocks the past six years. Lower rates make stocks more attractive than lower-yielding bonds, spur risk-taking and also boost economic growth and consumer spending.

"Today's action says that (short-term) interest rates won't remain at zero indefinitely, but the ensuing rise in rates will be slow and gradual," says Sung Won Sohn, finance professor at California State University-CI.

The Fed said before it starts to normalize rates, it would still like to see "further improvement in the labor market" and also be "reasonably confident that inflation will move back to its 2% objective over the medium term.

Wall Street pros pointed out that the Fed lowered both its inflation projection for 2015 as well as its forecast for where the Fed's short-term rate target will be at year's end. Those two changes also lead bulls to believe that rate hikes are further off into the future than believed heading into today.

"Patient" is gone, replaced by language that means the same thing, while maximizing the Fed's freedom of action," says Don Luskin, chief investment officer at TrendMacro.

But "the key development," he adds, "is not the guidance language, but rather the 'so-called 'dots' — which show a lower Fed funds rate for end of 2015, and more important, in the 'longer run.'"

"This change in the forward guidance does not indicate that the (Fed) has decided on the timing of the initial rate increase," the Fed statement said.

The Fed's benchmark rate has been near zero since the 2008 financial crisis, which has helped fuel the six-year bull market.

Oil fell below $43 a barrel as U.S. benchmark crude plunged 2.1% to $42.56 in electronic trading on the New York Mercantile Exchange. The drop comes ahead of the release of the Energy Information Administration's weekly information on petroleum inventories.

WHAT TO WATCH: Crude oil plunges again

The yield on the 10-year Treasury note fell below the key 2% threshold, dipping as low as 1.91% from 2.05% Tuesday.

In earnings news: FedEx (FEDEX) shares fell 2% after the package-delivery company reported earnings that beat expectations but revenue that fell short.

In Asia, Japan's Nikkei 225 index gained 0.6% and Hong Kong's Hang Seng index rose 0.9%. The Shanghai Composite surged 2.1% to end at 3577.30, the highest level in seven years, after Premier Li Keqiang said over the weekend that policymakers have enough room and tools to shore up economic growth if it falters.

European shares were mixed Wednesday. France's CAC 40 was down 0.1%. Germany's DAX slipped 0.5% and Britain's FTSE 100 added 1.6%.

Stocks ended mostly lower Tuesday as investors waited for clues on when the central bank may begin raising rates.

Contributing: Associated Press