updated 2/15/2007 8:06:53 AM ET 2007-02-15T13:06:53

The Dow Jones industrials set a new high Wednesday as stocks extended their gains for a second day after Federal Reserve Chairman Ben Bernanke told a Senate panel the economy should grow modestly this year despite a slowdown in housing and that he expects inflation will continue to ease.

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The combined gains Tuesday and Wednesday were the Dow’s biggest since Aug. 15-16.

Wall Street, which had faced some concern about whether Bernanke might sound a hawkish note on inflation, welcomed his benign remarks. While investors might debate whether the Fed will lower short-term interest rates later this year, Wall Street appeared more confident the central bank was at least likely to leave rates unchanged, as it has in recent meetings.

Investors pleased by a sense that the overall economy is doing well managed to look past a Commerce Department report that retail sales were essentially flat in January amid slumping automobile sales. It was the weakest showing in three months and below what Wall Street had forecast.

Earnings news from Coca-Cola Co. disappointed Wall Street. DaimlerChrysler AG pleased investors, however, by saying about 13,000 Chrysler workers would lose their jobs under a plan to restore the U.S. operations’ profitability by next year.

“I think what we’re having is a victory lap. So far the Fed’s forecasts have been almost been spot on,” said Drew Matus, senior economist at Lehman Brothers Inc. “So what this tells us is that the Fed is most likely not in any hurry to move rates in either direction.”

According to preliminary calculations, the Dow Jones industrial average rose 87.01, or 0.69 percent, to 12,741.86. Following release of Bernanke’s remarks the Dow set an intraday high of 12,759.40, eclipsing a high of 12,700.28 set Feb. 7. The blue chip average also finished at a new high, its 28th record close since the start of October. The previous record, set Feb. 1, was 12,673.68.

Broader stock indicators also climbed. The Standard & Poor’s 500 index rose 11.04, or 0.76 percent, to 1,455.30. The large-cap index reached a six-and-a-half year high of 1,457.65.

The Nasdaq composite index gained 28.50, or 1.16 percent, rising to 2,488.38.

Bonds rose sharply following Bernanke’s testimony, with the yield on the benchmark 10-year Treasury note falling to 4.74 percent from 4.81 percent late Tuesday. The dollar was mostly lower though higher against the yen, while gold prices rose.

Light, sweet crude settled down $1.06 to $58 on the New York Mercantile Exchange after weekly domestic inventory data showed stores of distillates such as home heating oil fell by less than analysts had been expecting. A brush of cold weather across much of the nation had led forecasters to expect a larger decline.

But much of investors’ attention remained on Bernanke’s testimony. He didn’t rule out the possibility of rate hikes, saying interest rates remain “somewhat elevated.” Investors were also receptive to his assessment that a precipitous slowdown in the housing sector was showing early signs of easing.

Matus said the Fed appears mostly happy with where the economy stands and that a rate hike would likely come only after the economy gave off strong inflationary signals.

“Given what we heard from him there would need to be some pretty good evidence that inflation was moving in the wrong direction,” Matus said. “There’s no sense in rocking the boat if the boat is going in the right direction.”

The Fed left short-term interest rates, the rate banks charge each other for overnight loans, at 5.25 percent in late January. It was the fifth straight time the Fed had stood pat on interest rates and followed a string of 17 consecutive increases that began in 2004 that were designed to cool a robust economy.

The flurry of news Wednesday follows a day in which stocks showed sharp gains — the Dow Jones industrial average added 102 points — after news that two companies were vying for aluminum producer Alcoa Inc. helped drive a notion that Wall Street would see an uptick in acquisition activity. Alcoa was off 43 cents at $34.57.

In corporate news Wednesday, Coca-Cola’s fourth-quarter profit fell 22 percent despite higher sales. Excluding one-time items, the world’s largest beverage maker’s profit topped Wall Street’s forecast. Coca-Cola slipped 33 cents to $47.88.

DaimlerChrysler rose $5.33, or 8.3 percent, to $69.78 after announcing its plan to slash costs.

Deere & Co. rose $9.24, or 9 percent, to $111.91 after the maker of farm equipment said profits increased as sales overseas made up for declines in the U.S. and Canada.

Garmin Ltd., which makes navigation devices that use global positioning systems, saw fourth-quarter profits more than double amid strong sales. Garmin advanced $4.29, or 8.1 percent, to $57.

Solar cell maker First Solar Inc. surged $9.44, or 27.5 percent, to $43.72 after its fourth-quarter profit topped Wall Street’s forecast.

Daktronics Inc. fell $8, or 21 percent, to $30.09 after company, which makes electronic scoreboards and video displays, predicted fourth-quarter revenue would come in below Wall Street’s expectations.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 1.52 billion shares compared with 1.32 billion shares traded Tuesday.

The Russell 2000 index of smaller companies rose 1.46, or 0.18 percent, to 813.99. The Russell also set a new intraday high of 818.19, edging past a high of 817.01 set Friday.

Overseas, Japan’s Nikkei stock average rose 0.74 percent. Britain’s FTSE 100 closed up 0.62 percent, Germany’s DAX index gained 0.95 percent, and France’s CAC-40 increased 0.76 percent.

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