Stocks Rally on Soothing Fed Statement

Stocks surged Tuesday after the Federal Reserve (search) raised interest rates a quarter point, as expected, and said in its much-followed statement that the economy was poised for growth. All three major indexes posted their biggest percentage gains in two months.

The Dow Jones industrial average (search) gained 130.01 points, or 1.32 percent, at 9,944.67. The Standard & Poor's 500 Index rose 13.82 points, or 1.30 percent, at 1,079.04. The technology-laced Nasdaq Composite Index rallied 34.06 points, or 1.92 percent, at 1,808.70.

As expected, the Federal Open Market Committee (search) raised benchmark interest rates by a quarter percentage point, to 1.5 percent, the second hike in the past three months. But investors were more concerned with the central bank's accompanying economic assessment.

The Fed said the economy has slowed, including job creation, but added that it "appears poised to resume a stronger pace of expansion going forward." The Fed said soaring energy prices contributed to the weakness, but that their effect would be transitory.

That appeared to cheer investors, who were already buying stocks Tuesday in response to a dip in oil prices. But analysts didn't see the gains as significant.

"The Fed did what it was expected to do. But in the long term, in light of the economic weakness, this bounce we're seeing in stocks is really not meaningful," said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers in Boston. "I think we need to look at the subsequent economic data and then to third-quarter earnings to see what kind of economy we're going to have."

The Fed's next meeting will occur on Sept. 21. While another rate increase could come at that time, analysts said it will depend on the data between now and then.

If the next employment report shows continued weakness, then the Fed is expected to take a breather in its rate increases.

However, if the slowdown that began in June proves to be temporary, as Greenspan has predicted, then private economists said the central bank could well continue with further rate increases in September and at the Fed's last two meetings of the year in November and December.

While prices rallied impressively — the Dow had its biggest one-day advance since June 7 — the question remained whether the markets would continue to make up lost ground after last week's major selloff.

"I think there's reason to be bullish," said Robert Millen, co-portfolio manager with the Jensen Portfolio in Portland, Ore. "What gives me a lot of comfort in the long term is that there are a lot of good things going on in the economy. Companies that have good pricing power and competitive advantages are going to do well."

Meanwhile, world oil prices, which have been a large downward influence on stocks, eased from fresh record highs on Tuesday.

NYMEX (search) crude oil ended lower Tuesday, backing down from an all-time high above $45 a barrel after Iraq restored full production from its southern oil fields. September crude settled down 32 cents at $44.52 a barrel after rising in the morning to $45.04, the loftiest level since NYMEX launched its oil futures in 1983.

Despite the downturn in consumer spending and job creation through June and July, the Labor Department (search) announced a 2.9 percent hike in worker productivity for the second quarter. While it was the smallest increase since 2002, it was far more than economists had expected.

"Really, we're in a heavily oversold market, and I think the path of least resistance this week has to be to the upside," said Brian Pears, head equity trader at Victory Capital Management in Cleveland. "In the short term, I think the stars are aligning to get us out of this oversold condition this week."

Networking company Cisco Systems Corp. (CSCO) boosted the technology-laced Nasdaq and the Standard & Poor's 500 index with a 2 percent rise, although shares slipped in after-hours trading. After the bell, Cisco posted a higher quarterly profit and sales on rising demand from corporate cur its networking gear.

Among stocks making gains was Walt Disney Co. (DIS), up 50 cents to $22.44. Shares rose further in after-hours trading after Disney posted a rise in quarterly profit as strong showings by its theme parks and cable channels offset weakness at ABC television and its film studio.

EchoStar Communications Corp. (DISH) helped the Nasdaq after reporting better subscriber growth for its satellite television service than some analysts had predicted and authorizing a $1 billion stock repurchase plan. Its stock rose 8.4 percent, up $2.29 at $29.55.

May Department Stores Co. (MAY), parent company of Lord & Taylor and Marshall Field, swung to a profit in the second quarter, beating estimates by a penny. May rose $1.00 to $25.90.

Watch maker Fossil Inc. (FOSL) posted a 52 percent rise in quarterly earnings, beating analysts' estimates by 4 cents per share. Fossil gained $3.60, or 16 percent, to $25.77.

Embattled financial company Riggs National Inc. (RIGS), under federal investigation for its handling of diplomatic accounts in Washington, was up 16 cents at $22.40 after reporting a loss for the quarter due to fines imposed by regulators.

Security software maker Symantec Inc. (SYMC) rose 71 cents to $46.28 after saying it would restate its first-quarter earnings, lowering its revenue by $20 million to correct an accounting error.

Trading was active, with 1.25 billion shares changing hands on the New York Stock Exchange, below the 1.4 billion daily average for last year. About 1.45 billion shares were traded on Nasdaq, below the 1.69 billion daily average last year.

Advancers outnumbered decliners on the NYSE and the Nasdaq by about 3 to 1.

The Russell 2000 index of smaller companies was up 11.36, or 2.2 percent, at 529.74.

Overseas, Japan's Nikkei stock average rose 0.4 percent. In Europe, Britain's FTSE 100 closed up 0.8 percent, France's CAC-40 climbed 1 percent for the session and Germany's DAX index gained 0.8 percent.

Reuters and the Associated Press contributed to this report.