Stocks rose Tuesday after the Conference Board said its consumer confidence index hit a two-year high, but worries about the Federal Reserve's handling of interest rates in the months ahead limited the market's momentum.  

The Dow Jones industrial average (searchgained 56.34 points, or 0.54 percent, to 10,413.43. The Standard & Poor's 500 Index (searchgained 2.88 points, or 0.25 percent, to 1,136.23. The technology-laced Nasdaq Composite Index (searchgained 15.11 points, or 0.75 percent, to 2,034.93.

Trading was moderate, with about 1.4 billion shares traded on the New York Stock Exchange and 1.6 billion shares on Nasdaq.

The Conference Board (search), a private forecasting body, said its index of consumer confidence rose to 101.9 in June, from 93.1 in May, way above analysts' expectations for a reading of 95.0 this month and its highest since June 2002, as labor market conditions continued to improve and gas prices eased after hitting record highs.

"The nice thing about this number is that you get all the good news, but it doesn't necessarily correlate to inflation," said Michael Palazzi, managing director of equity trading at SG Cowen Securities. "Yes, inflation will follow and rates will go up, but we have a strong base for the economy, rates are still low, and now we have a lot of confidence."

Lackluster sales forecasts from Target Corp. and Wal-Mart Stores Inc. hit the retail sector, but some analysts said it tempered fears the economy may expand too quickly and force the Fed to act more aggressively on rates.

"What (investors) want is an economy that's strong enough to avoid stalls, but not so fast that it threatens overheating," Ezrati said.

Wall Street is anxiously awaiting the outcome of the Fed's policy-setting Federal Open Market Committee (search) meeting, which began Tuesday and concludes Wednesday afternoon. The FOMC is widely expected Wednesday to raise overnight borrowing costs a quarter-point from the current 46-year low of 1 percent.

Most of the attention will be on what the Fed says to accompany any rate hike, analysts say, as investors look for clues to the timing and pace of further increases.

"I think they've set the market up for 25 points, and they're going to do 25 points," said Henry Herrmann, chief investment officer at Waddell & Reed. "The interesting thing will then be what they say in the phraseology about, most importantly, inflation."

Speculation has been building that the Fed may have to be more aggressive in its rate hikes to stave off inflation. Investors worry that higher borrowing costs could curb business and consumer spending, which has been a mainstay of the U.S. economy.

Sliding oil prices also gave the market a lift, with prices falling to their lowest in two months as the power handover in Iraq raised hopes for less sabotage and steadier exports. NYMEX (search) August crude oil futures fell 58 cents to settle at $35.66.

Washington Mutual Inc. (WM) and Target Corp. (TGT) warned that their earnings would be lower than expected. Investors feared an interest rate hike would harm financial stocks, while Target's warning, combined with a similar outlook from Wal-Mart Stores Inc. (WMT), did not bode well for retailers.

Target fell $1.75 to $42.29 after Prudential lowered its estimates of same-store sales growth for the quarter. The discount retailer has also warned that sales would be below Wall Street expectations.

Washington Mutual skidded $2.84 to $38.47 after the Seattle-based bank lowered its 2004 earnings forecasts, citing the impact of rising interest rates on its mortgage business.

Pfizer Inc.'s (PFE) chief financial officer told Reuters on Monday that the risk of draconian U.S. price controls on prescription drugs is increasing but could be lessened if federal trade officials successfully challenge "protection" in Canada and Europe for costly generic drugs.

Pfizer's shares rose 28 cents, or 0.8 percent, to $34.34. Johnson & Johnson (JNJ) stock advanced 77 cents, or 1.4 percent, to $55.74.

Qualcomm (QCOM) reached a three-year high, rising more than 4 percent on Tuesday after Bank of America said in a research note the mobile phone chipmaker would benefit as phone companies develop high-speed mobile services based on its wireless technology. It climbed $2.88 to $71.55, after rising as high as $71.90.

McCormick & Co. (MKC) announced a record 11 percent increase in quarterly sales, beating Wall Street estimates by 2 cents per share. The spice manufacturer fell 33 cents to $34.07.

A bullish analysis from Lehman Brothers wasn't enough to boost Boeing Co. (BA), which gained 30 cents to $50.51. The brokerage firm increased its earnings outlook for the aircraft manufacturer based on stronger aircraft deliveries.

Online retailer Amazon.com (AMZN) said it is seeking to dissolve its partnership with Toys "R" Us Inc., claiming its contract with the toy retailer has been a "chronic failure." The two are embroiled in a legal battle and have entered mediation. Amazon rose 32 cents to $53.71, while Toys "R" Us (TOY) lost 30 cents to $15.88.

The Russell 2000 index of smaller companies was up 3.73, or 0.6 percent, at 587.83.

Overseas, Japan's Nikkei stock average slipped 0.2 percent. In Europe, Britain's FTSE 100 closed down 0.1 percent, France's CAC-40 fell 0.4 percent for the session, and Germany's DAX index ended the day flat.

Reuters and the Associated Press contributed to this report.