NEW YORK – Stocks rose Tuesday after the Federal Reserve (search) fulfilled market expectations by increasing interest rates for a third time this year and saying that the economy had "regained some traction." Investors also welcomed strong earnings from financial services companies and upbeat economic data.
The Dow Jones industrial average (search) closed up 40.04 points, or 0.39 percent, at 10,244.93. The Standard & Poor's 500 Index (search) ended the day up 7.10 points, or 0.63 percent, at 1,129.30. The technology-laced Nasdaq Composite Index (search) finished up 13.11 points, or 0.69 percent, at 1,921.18.
For both the S&P 500 and the Nasdaq, it was the the highest close in more than two months.
The policy-setting Federal Open Market Committee (search) moved the benchmark federal funds rate -- which influences credit costs throughout the economy -- by a quarter point to 1.75 percent. The widely anticipated decision and the statement issued alongside it were viewed as a signal that the central bank sees continued improvements in the economic outlook and inflation.
"I think it's basically a pretty positive statement," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "I doubt that this hike, which was widely expected, will have any meaningful impact on the economy, but it will have a positive psychological effect on the market, because it is reassuring the world that the economy is doing better."
In economic news, U.S. housing starts rose unexpectedly by 0.6 percent in August to their highest level in five months as low mortgage rates encouraged residential construction. But permits for new home construction fell more than anticipated, the Commerce Department (search) said on Tuesday.
The upbeat economic data reinforced Fed Chairman Alan Greenspan's (search) view that the economy is on firmer footing since striking a soft patch in the late spring. In the statement issued Tuesday, the Fed said "output growth appears to have regained some traction, and labor market conditions have improved modestly."
With inflation expected to remain low despite rising energy prices, Greenspan and the other Fed governors said they believe "policy accommodation can be removed at a pace that is likely to be measured," language they've used before, which economists interpret to mean rates will continue to rise at a gradual pace. Most economists believe the federal funds rate — the rate banks charge each other on overnight loans — will go up another quarter-percentage point after the presidential election in November. Beyond that, the predictions become more cloudy.
Persistently high energy prices still continue to weigh heavily on investors' minds. Global supply concerns were further exacerbated by Russian oil giant Yukos' announcement that it would halt shipments to China due to financial troubles related to its ongoing fight with Moscow over back taxes. Light sweet crude for October delivery settled up 75 cents at $47.10.
The price spike was enough to boost energy shares like Exxon Mobil Corp. (XOM) and ChevronTexaco Corp. (CVX). Exxon shares rose $1.28, or 2.7 percent, to $49.49 and Chevron advanced $1.49, or almost 3 percent, to $53.52.
Goldman's shares rose $3.22 or 3.5 percent to $94.90 while Lehman Brothers rose $3.73 or almost 5 percent to $79.75. J.P. Morgan Chase & Co. also rose, climbing 72 cents or almost 2 percent to $40.10.
Adobe Systems Inc. (ADBE), the maker of Photoshop software, helped the Nasdaq a day after reporting its quarterly earnings jumped 62 percent. Adobe shares surged $2.50, or 5.2 percent, to $50.45.
Martha Stewart Living Omnimedia Inc. (MSO) jumped 12.5 percent, or $1.64, to $14.81 on speculation the company's namesake founder could retool her television show with "Survivor" creator Mark Burnett after she leaves prison.
Among decliners, General Mills Inc. (GSI) fell 98 cents to $45.35 after the cereal maker reported a 19 percent dip in earnings due to higher prices for ingredients and restructuring costs. The company has raised prices of its products to reflect higher commodity prices, but the effect is only now being felt; results for the next quarter are expected to be stronger.
Altria Group Inc. (MO), parent of Philip Morris USA, fell almost 2 percent to $46.15 as major cigarette makers went on trial in the U.S. government's $280 billion racketeering case that accuses the tobacco industry of deliberately deceiving the public since the 1950s about the risks of smoking.
Advancing issues outnumbered decliners by more than 2 to 1 on the New York Stock Exchange. Volume came to 355.49 million shares, compared to 357.19 million traded at the same point Monday.
Trading was moderate, with 1.3 billion shares changing hands on the New York Stock Exchange, below the 1.4 billion daily average for last year. About 1.5 billion shares were traded on Nasdaq, under the 1.69 billion daily average last year.
More than 2 stocks advanced for every 1 that declined on the NYSE. On Nasdaq, the number of advancers led decliners by 2 to 1.
The Russell 2000 index, which tracks smaller company stocks, was up 6.18, or 1.1 percent, at 576.92.
Overseas, Japan's Nikkei 225 closed 0.01 percent lower Tuesday. In Europe, France's CAC-40 added 0.7 percent, Britain's FTSE 100 rose 0.6 percent and Germany's DAX index was up 0.3 percent.
Reuters and the Associated Press contributed to this report.