U.S. stocks closed sharply higher on Wednesday as investors cheered the Federal Reserve's statement that indicated a rate hike would come later rather than sooner. (Tweet this) The Fed dropped the word "patient" from its March meeting statement, a subtle indication that the era of zero interest rates is about to end.

However, the U.S. central bank came off as mostly dovish as the Federal Open Market Committee lowered its December rate outlook by about 50 basis points. "That's what the market is getting most excited about," said Ashwin Bulchandani, chief risk officer and market strategist at MatlinPatterson. The Fed "came down to the market." Doug Cote, chief market strategist at Voya Investment Management, had expected the Fed to balance its removal of "patient" from its statement by lowering its rate forecast, following a similar decrease in December.

"It looks like a dramatic cut," he said, following the release of the Fed's dot plot that showed the median rate increase expectations fell from 1.125 percent to about 0.60 percent. Read MoreDovish Fed whipsaws markets U.S. stocks quickly reversed losses following the news, with the Dow Jones industrial average recovering a 150-point loss to briefly climb more than 240 points higher and hold above 18,000 in the close. The index had ten triple-digit closes in the last two weeks, with half up and half down. "The Fed was... far more dovish than what the market was looking for and that's why we rallied," said Krishna Memani, chief investment officer at Oppenheimer Funds. "What we focus (now) on is forward growth and forward inflation expectations." The Nasdaq briefly hit 5,000 again for the first time since it closed above that psychologically key level earlier this month. The S&P 500 also briefly topped 2,100. The Russell 2000 closed at a new high.

"I think (the Fed) has been an overhang we've put behind us," said Art Hogan chief market strategist at Wunderlich Securities. It will be "constructive for markets."



Dan Heckman, senior fixed income strategist at US Bank Wealth Management, still expects a rate hike this year. "Barring any dramatic change the Fed said they will raise rates this year (and they) don't want to lose credibility," he said. The Fed funds futures indicated a shift in the probability of a rate hike to October from September, according to CME Group data.

Read MoreUnderstanding what informs Fed policy decisions

In a press conference following the statement's release, Fed Chair Janet Yellen said she is not ruling out a rate hike after April and that the timing of a raise is data dependent.

"Overall there's no huge surprise but the market has rallied on (the fact that) the Fed has more flexibility. They don't have to be impatient," said Myles Clouston, senior director with Nasdaq Advisory Services. "From what we're hearing there still seems to be a high degree of agreement (that a rate hike will) likely be in the September timeframe."

"I think today provided a lot of comfort in the near-mid term," he said. "It settled the market down a bit." The U.S. 2-year Treasury note yield plunged to trade near 0.55 percent following the news. The 10-year yield fell to 1.93 percent. The U.S. dollar had its worst daily drop since March 18, 2009, with the euro climbing above $1.09. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to trade below 14 after the Fed announcement.

Check out CNBC's full coverage on the Federal Reserve's announcement here. Crude oil futures settled up $1.46 at $46.65 a barrel on the New York Mercantile Exchange. Gold futures settled up $3.10 or $1,151.30 an ounce. Oil initially extended losses following the U.S. Energy Information Administration report that oil inventories rose 9.6 million barrels. Crude traded above $42 a barrel and Brent crept above $54 a barrel in early afternoon trade.

"In the near term it's easy to read (strong dollar, low oil) as a negative," said Maris Ogg, president of Tower Bridge Advisors. "I think we're going to waffle around until we see some uncertainty resolve." Read MoreUS rate-storm brews, get set for another 'tantrum' In more housing news, weekly mortgage applications fell 3.9 percent despite the drop in interest rates, the Mortgage Bankers Association reported.