Stocks extend gains, dollar eases after Fed

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks gained and the dollar index eased on Wednesday after the U.S. Federal Reserve left interest rates unchanged but signalled it could tighten monetary policy by year end.

U.S. economic activity had picked up and job gains were "solid" in recent months, the U.S. central bank said in a statement following the two-day policy meeting.

The Fed has held its target rate for overnight lending between banks in a range of 0.25 percent to 0.50 percent since December, when it raised borrowing costs for the first time in nearly a decade.

U.S. Treasury yields briefly extended their rise after the statement. The two-year yield was last at 0.782 percent, up 0.4 basis point from late on Tuesday.

"It's as expected. I think the (stock) market will view it as good news. The body language makes it sound like they're warming people up for December," said Stephen Massocca, chief investment officer, Wedbush Equity Management in San Francisco.

Earlier, the Bank of Japan overhauled its monetary policy to target interest rates.

The BOJ maintained its 0.1 percent negative interest rate, but abandoned its base money target. Instead, it set a "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields around their current zero percent.

The Dow Jones industrial average was up 48.01 points, or 0.26 percent, to 18,177.97, the S&P 500 had gained 8.52 points, or 0.4 percent, to 2,148.28 and the Nasdaq Composite had added 19.20 points, or 0.37 percent, to 5,260.55.

MSCI's all-country world stock index was up 0.6 percent, while Europe's STOXX 600 <.STOXX> closed up 0.4 percent, helped by euro zone banking shares.

The dollar index eased further following the decision, hitting a five-day low of 95.515 after the Fed decision. It was last down 0.2 percent.

U.S. oil prices stayed higher after the decision, settling up 2.9 percent.

(Additional reporting by Sinead Carew in New York; Editing by Meredith Mazzilli and Nick Zieminski)