Blue chips finished Tuesday with solid gains, having fluctuated in afternoon trading after the U.S. Federal Reserve said it has decided to keep a key interest rate steady at four-decade low, as expected, and acknowledged some weakness in the labor market.
“Wall Street has seen no real threat in the Fed’s statement and they have decided to stay in the party” Arthur Cashin, head of New York Stock Exchange floor trading at UBS Financial Services, told CNBC.
Stocks edged higher ahead of the Fed’s announcement, which came shortly after 2:15 p.m. ET, rebounding from a triple-digit loss seen in Monday’s session after some positive earnings news from 3M and Lehman Brothers. Monday’s losses drove the main market indices to their lowest levels so far this year.
Stocks held on to their advance after the Fed’s decision, but gave up almost all of their gains sharply before 3 p.m. ET, only to recover most of those losses toward the close. The Dow Jones industrial average finished the day up 81.78 points, or 0.8 percent.
In its post-meeting statement, the Fed reiterated its promise to remain “patient” before starting to raise the 1 percent federal funds rate from its lowest level in over 40 years. Many analysts believe it could be early next year before rates are raised again.
The Fed also said inflation remains tame, but acknowledged recent signs of continued weakness in the labor market after a surprisingly soft February job market report. The Fed said that "although job losses have slowed, new hiring has lagged," adding that "increases in core consumer prices are muted and expected to remain low."
“This is good,” said Peter Dunay, chief market strategist at brokerage Wall Street Access. “The Fed said there’s no risk of inflation, and that means they can keep rates low. Once inflation becomes a problem, they’ll be forced to raise rates,” he added.
Broader stock indices closed Tuesday with gains, but were off their early-session highs. The Standard & Poor’s 500-stock index rose 6.21 points, or 0.6 percent, and the technology-loaded Nasdaq Composite index finished the day up 3.89 points, or 0.2 percent.
Security fears have weighed heavily on Wall Street in the prior three trading sessions, driving the market's main stock indices into negative ground for the year amid fear of more acts of terrorism after news that the al-Qaida terrorist network may have been involved in a series of deadly bombings in Madrid last week.
On Monday, terror concerns drove the Dow down 137 points to a fresh low for the year. It was the Dow's fifth losing session in six.
3M was the Dow’s strongest component Tuesday, rising 5.3 percent to $78.81 after the diversified manufacturer, widely seen as a bellwether for U.S. industry, boosted its profit estimates for the first quarter and full year citing better demand and the weaker dollar.
Investor sentiment was also buoyed by Lehman Brothers Holdings, one of Wall Street's biggest investment banks. Early Tuesday, Lehman said its quarterly profit more than doubled, driven by higher revenue from bond and equity trading, stock sales and mergers.
Before the open, a report from the Commerce Department showed the U.S. housing market struggled for the second month in a row in February because of bad weather.
U.S. homebuilders broke ground on homes at a slower pace last month, the government said, as starts of new homes fell 4.0 percent to a seasonally adjusted annual rate of 1.855 million in February, well below the 1.930 million pace that analysts had projected.
In other economic news Manpower, the world’s number-two staffing company, released a survey that shows U.S. employers are more confident about hiring people and fewer plan to lay off staff in the second quarter of this year than in the current quarter.
United Technologies, which is probing possible collusive arrangements among elevator makers, said Tuesday employees of its Otis elevator business may have engaged in activities that violated company policy and applicable competition law.
The firm also said the European Commission recently conducted surprise inspections at the offices of its Otis subsidiaries in Europe.
In other company news, Bank of America and FleetBoston Financial agreed to pay a total of $515 million to resolve allegations of improper mutual fund trading. The two companies are set to merge in April.
Also, shares of Metro Goldwyn Mayer jumped 12 percent to $18.15 after the film studio said it was considering paying a large one-time dividend to investors. Media reports pegged the dividend at between $6 and $9 per share.
European bourses were helped by a merger involving French bank BNP Paribas, which said its U.S. arm, BancWest, would buy Fargo, N.D.-based Community First Bankshares for $1.2 billion, pushing the European company deeper into U.S. retail banking.
In Europe, Britain’s FTSE 100 rose 0.4 percent, Germany’s DAX gained 0.3 percent and France’s CAC-40 rose 0.4 percent. Earlier, Tokyo's benchmark Nikkei average closed 0.7 percent lower.
Reuters contributed to this report