Stocks rebound from slide as Federal Reserve sounds more upbeat note on economy; Dow adds 42

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Stocks end higher on Fed’s economic assessment

NEW YORK — The Federal Reserve reassured stock market investors Wednesday that the economy is improving and that interest rates will stay low.

Stocks recovered from an early slide to end moderately higher after the Fed issued a more upbeat assessment of the economy following a two-day meeting on interest rates. The Dow Jones industrial average rose 42 points.

Treasury prices also reversed direction and began falling as investors withdrew money from safe haven holdings.

The Fed’s statement that “economic activity has continued to strengthen” since its last meeting injected some calm into a nervous market. Stocks have fallen in five of the last eight days as investors question what effect a more assertive Washington will have on Wall Street. Some investors are also concerned that stocks have risen too fast in a 10-month climb that has left the Standard & Poor’s 500 index up 62.2 percent.

The Fed left interest rates near zero, as expected. Analysts said that a dissenting vote on the decision from Kansas City Federal Reserve President Thomas Hoenig was a sign that the economy is improving enough to at least discuss boosting the key lending rate.

“That means there are a couple of people who feel like that the economy is getting better at a nice rate that no longer warrants these exceptionally low rates,” said Jamie Cox of Harris Financial Group in Colonial Heights, Va.

The Fed also said it still plans to end a program to lower mortgage rates as expected on March 31. Analysts said that was a sign of confidence in a recovery in the housing market.

Stocks had fallen ahead of the Fed’s announcement as the Commerce Department said sales of new homes fell 7.6 percent in December.

The market, as measured by index futures trading, showed a mildly positive reaction to President Barack Obama’s State of the Union address Wednesday night. In his text, Obama mentioned his proposed tax aimed at recovering bailout money lent to financial companies in 2008-09. However, he did not refer to his plan to keep banks from growing too big and to restrict their risky trading practices.

The Dow Jones industrial average rose 41.87, or 0.4 percent, to 10,236.16. It was down about 40 ahead of the Fed’s statement. The Standard & Poor’s 500 index rose 5.33, or 0.5 percent, to 1,097.50, while the Nasdaq composite index rose 17.68, or 0.8 percent, to 2,221.41.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.66 percent from 3.63 percent late Tuesday.

The dollar rose against most other major currencies, while gold fell.

Scott Marcouiller, senior equity market strategist Wells Fargo Advisors in St. Louis, said the Fed’s statement that it is slowing its purchase of mortgage-backed securities suggests the central bank believes the U.S. housing market is improving.

The Fed said it expects to complete the purchase of $1.25 trillion in agency mortgage-backed securities and about $175 billion in agency debt by the end of the first quarter.

“This tells me that they’re comfortable with how the economy is progressing, even though they didn’t come right out and say that.”

Reassurance from the Fed couldn’t erase all of investors’ worries about the economy. Caterpillar Inc. hurt the Dow industrials after the equipment maker issued a cautious forecast. The stock fell $2.41, or 4.3 percent, to $53.44.

Apple Inc. rose $1.94, or 0.9 percent, to $208.99 after the company announced a tablet-style computer that looks like a large iPhone.

The Fed’s announcement was one of several events in Washington to command investors’ attention.

Treasury Secretary Timothy Geithner defended the government’s rescue last year of insurance giant American International Group Inc. in hearings on Capitol Hill. Analysts said the sometimes heated exchanges between Geithner and members of the House Committee on Oversight and Government Reform underscored concerns that Washington would be more assertive in its dealings with Wall Street.

Geithner oversaw the bailout as head of the Federal Reserve Bank of New York. Former Treasury Secretary Henry Paulson also testified.

Traders are also waiting to see whether Fed chairman Ben Bernanke, whose term ends Sunday, will win Senate approval for a second, four-year term. A vote is expected Thursday.

The hearings came after Obama said last week that he would seek to limit big banks’ trading. That drew concerns from investors that bank profits would suffer.

In other trading, crude oil fell $1.04 to settle at $73.67 per barrel on the New York Mercantile Exchange.

Falling stocks narrowly outpaced those that rose on the New York Stock Exchange, where consolidated volume came to 5.4 billion shares compared with 4.8 billion Tuesday.

The Russell 2000 index of smaller companies rose 6.22, or 1 percent, to 618.38.

Overseas markets fell for a second straight day on concerns about China’s move to curb bank lending. The country is trying to prevent speculative bubbles and rapid inflation as its economy continues to grow quickly. A slowdown in growth in China could stunt a global economic recovery.

Japan’s Nikkei stock average fell 0.7 percent and Hong Kong’s Hang Seng lost 0.4 percent. Britain’s FTSE 100 fell 1.1 percent, Germany’s DAX index lost 0.5 percent, and France’s CAC-40 dropped 1.2 percent.

AP Business Writer Ieva M. Augstums contributed to this story from Charlotte, N.C., and Business Writer Stephenson Jacobs contributed from New York.