Stocks were lower before the announcement, but after the Fed announced it would continue buying bonds at an $85 billion monthly pace for now, the Dow and S&P 500 indexes quickly climbed to all-time highs.
While equities jumped on the Fed's decision, questions remained how long the rally would last as the central bank expressed concerns about the economy's future growth with likely budget and debt limit battles in Washington to come.
Market participants had largely been expecting the central bank, after a two-day meeting of its policy-setting committee, to begin a withdrawal of the bond-buying program by about $10 billion a month.
"No taper, the market loves it. We will see if that lasts but boy, we are off to the races," said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.
"From a short-term stock market perspective it can be seen as a good thing because the market likes to see continued Fed stimulus. From a real economy standpoint, what it says is the Fed is actually more nervous about the economy than is generally perceived."
In a news conference following the announcement, Fed Chairman Ben Bernanke said the plan is to maintain a highly accommodative policy, with the central bank looking to see if its basic outlook for the economy is confirmed. Only then would the U.S. central bank take the first step to remove the stimulus.
The Dow Jones industrial average (^DJI) rose 147.21 points or 0.95 percent, to 15,676.94, the S&P 500 (^GSPC) gained 20.76 points or 1.22 percent, to 1,725.52 and the Nasdaq Composite (^IXIC) added 37.942 points or 1.01 percent, to 3,783.641.
The S&P's previous closing high was 1,709.67 and the Dow's was 15,658.36, both on August 2.
About 580 stocks on the NYSE and Nasdaq hit new 52-week highs on Wednesday. About 325 of them hit their highs after the Fed announcement. Priceline.com Inc (PCLN) hit an intraday high of $1001, the first S&P 500 company in history to reach that landmark level. Shares in the online travel agency closed up 2.6 percent at $995.09.
The Fed also lowered its forecasts for economic growth. It now sees growth in a 2 percent to 2.3 percent range this year, down from 2.3 percent to 2.6 percent in its June estimates. The downgrade for next year was even sharper, 2.9 percent to 3.1 percent compared with 3.0 percent to 3.5 percent.
Separately, a White House official said Federal Reserve Vice Chairwoman Janet Yellen was the front runner to take over the top job at the U.S. central bank when Bernanke's term ends in January, the strongest indication yet of her likely nomination.