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Dow gains 1% as US economic growth disappoints

Stocks closed sharply higher for a second session on Wednesday after weaker-than-expected U.S. economic growth in the first quarter diminished worries that the Fed would rein in its stimulus measures in the immediate future.

The Dow Jones Industrial Average closed 149.83 points, or just over 1 percent higher at 14,910.14, led by Boeing and Johnson & Johnson, after logging a triple-digit gain on Tuesday.

The S&P 500 and the Nasdaq also finished sharply higher. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, declined below 18.

All key S&P sectors ended in positive territory, led by health care and consumer discretionary.

The market responded to the Commerce Department's announcement that U.S. Gross Domestic Product expanded at a tepid 1.8 percent annual rate in the first quarter of this year.  The figure had been cut from a previously reported 2.4 percent pace. Economists polled by Reuters had expected first-quarter GDP growth would be left unrevised.

"It does show that the Fed may have jumped the gun on how good this economy actually is and since the Fed is very data-dependent, they can't be very happy about this," said Doug Cote, chief market strategist at ING Investment Management.

"The biggest thing I'm looking at in this report is consumer spending, which fell to 2.6 percent from 3.4 percent. And with mortgage rates going back up, the effect could spill over into the housing market—we're at an inflection point and it will be very volatile getting back to normal," he said.

A report earlier showed mortgage rates soared to the highest level in nearly two years, according to the Mortgage Bankers Association, as borrowing costs whistled higher on the heels of the Fed's latest policy meeting, when the central bank signaled that it could start cutting back on its stimulus efforts later this year.

Minneapolis Fed President Narayana Kocherlakota told CNBC that the central bank needs to be clearer on the future of short-term interest rates, not just on when the central bank might start to taper its $85-billion-a-month bond-buying program.

Kocherlakota added that the market volatility really comes from uncertainty on when the Fed funds rate might go higher.

Meanwhile, the People's Bank of China (PBOC) released a statement saying that it would provide cash to institutions that needed it. But despite the subsequent uptick in markets, analysts warned there was still plenty of uncertainty in the banking system.

(Read More:Goldman Sees Struggle Ahead for Chinese Stocks)

"Analysts feel this PBOC intervention will only be supportive in the short-term, as the bigger picture is about banks deleveraging and creating a more sound banking system," wrote Stan Shamu, market strategist at IG.

Treasury prices eased their gains after the government sold $35 billion in five-year notes at a high yield of 1.484 percent. The bid-to-cover ratio, an indicator of demand, was 2.45.

(Read More: Three Reasons Rising Rates Could Crush Stocks: Pro)

Gold tumbled near its lowest level in almost three years and was on track for a record quarterly loss.

European shares ended higher after research firm GfK's forward-looking consumer sentiment indicator for Germany rose in July, topping expectations.