Fed: High Oil Prices Could Cause Temporary Inflation

Temporary inflation was one of the few substantive changes Federal officials predicted in its much-anticipated announcement this afternoon. But that hasn’t stopped stocks from nearing multi-year highs.

The Fed reiterated its intention to keep short-term interest rates close to zero through late 2014. The Federal Open Market Committee (FOMC) voted to stand pat and keep central bank easy-money policies in place.

Little has changed since the committee’s last announcement in January, but Fed chief Ben Bernanke did say today that inflation could rise temporarily because of the recent increase in oil prices. FOMC officials did not leave any clues as to whether a third bond-buying program – QE3 – is in the works to help speed up the economic recovery.

The Fed acknowledged improvements in the labor market but warned that plenty of economic risks are still in play.

Despite saying very little, the Fed announcement helped send stocks soaring in late-afternoon trading. The S&P 500 closed just shade under 1,400 – its highest level since May 2008 – after gaining more than 1.8% today. Meanwhile, the Dow was up a whopping 218 points – or 1.7% – to vault back above the hallowed 13,000 mark.

At 13,178, the Dow closed at its highest level since December 2007.

The Fed announcement was only partially responsible for stocks’ rapid ascent today. A report this morning that U.S. retail sales in February climbed at their fastest rate in five months gave the markets a nice head start prior to this afternoon’s FOMC announcement.