Stocks initially zigzagged after the Fed lowered interest rates as expected because some investors balked at the notion that the Fed might not lower rates again at its December meeting. However, investors eventually appeared relieved that the Fed's comments about the inflation — a perennial concern — signaled the central bank was able to return to somewhat more parochial worries and focus less about upheaval in the credit markets than when it met last month.

Wall Street was heartened by the fact that investors, businesses and consumers alike will be getting cheaper access to cash because of the widely anticipated quarter-point rate cut. The fed funds rate now stands at 4.50 percent. Last month, the Fed surprised the market with a larger-than-expected half-point cut in the funds rate — the rate banks charge each other for overnight loans.

After months of agonizing over an anemic credit market, investors appeared to take some solace that the Fed found room to offer a less accommodative statement than some had expected.

"A rather stingy Fed suggests that they see an economy that is in pretty good shape," said Bruce McCain, head of the investment strategy team for Key Private Bank.

"They're saying now we can turn back to the issue of inflation and implicit in that is that the economy is getting back on track," he said.

The Dow, which had dipped briefly into negative territory after the decision, rose 137.54, or 1 percent, to 13,930.01.

Broader stock indicators also advanced. The Standard & Poor's 500 index rose 18.36, or 1.20 percent, to 1,549.38, and the Nasdaq composite index rose 42.41, or 1.51 percent, to 2,859.12.

The Russell 2000 index of smaller companies rose 11.87, or 1.45 percent, to 828.02.

Treasury bond prices fell after the Fed's decision. The yield on the 10-year Treasury note, which moves inversely to its price, rose to 4.47 percent from 4.39 percent late Tuesday.

In comments following its two-day meeting, central bank policymakers said recent spikes in energy and commodity prices are among the forces that could be adding to inflation pressures and that with its latest move "the upside risks to inflation roughly balance the downside risks to growth."

The rate cut came after a 9-1 vote, with Kansas City Fed President Thomas Hoenig dissenting, arguing that he preferred no change in the funds rate. The Fed on Wednesday also lowered the rate it charges to lend directly to banks, the so-called discount rate.

The bank appeared more upbeat about the health of the economy than it did last month, when it said strains in the credit markets threatened to further pinch the housing market and the economy at large. The Fed said Wednesday that "economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance."

Quincy Krosby, chief investment strategist at The Hartford, said the market decided that the central bank wasn't necessarily ruling out further rate cuts.

"I think that the market finally realized after the initial drop-off that the Fed is saying 'Look, we're going to be data-dependent,"' she said. That would be a return to the Fed's mode of operation before the summer's constriction in the credit markets forced the bank to set aside some of its concerns about inflation.

Krosby added that after giving investors the rate cut, prudence demanded that Fed offer a somewhat cautious statement and address concerns about surging commodity prices. Oil hit another record Wednesday, while gold rose above $800 an ounce for the first time in 27 years.

"I think that upon analysis of it the market understood that you cannot have oil prices hitting almost $95 a barrel. You have to acknowledge commodity prices."

Oil futures climbed to nearly $95 per barrel for the first time after the government reported an unexpected drop in crude oil inventories for the second week in a row. Light, sweet crude rose $4.15 to settle on the New York Mercantile Exchange at $94.53. The dollar fell to a fresh low against the euro after the Fed's decision and gave up ground against other major currencies. With rates lower, some investors looked for higher-yielding currencies.

The day's rate cut came after the Commerce Department said the country's gross domestic product grew at an annual rate of 3.9 percent in the third quarter, a faster pace than the 3 percent growth economists had forecast on average.

Another Commerce Department report showed construction spending increased 0.3 percent in September, the best showing in four months. Spending on commercial construction and for government projects made up for weakness in home building.

The Chicago purchasing managers index of manufacturing activity in the Midwest showed a decline, falling to 49.7 for October from 54.2 a month earlier. A reading below 50 signals a contraction in activity. The index is seen as a harbinger of the national Institute for Supply Management report, to be released Thursday.

Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where consolidated volume came to 3.84 billion shares, compared with 3.11 billion shares traded Tuesday.