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Dow ekes out gain but DC stalemate dampens optimism over new Fed chief

The Dow and S&P 500 narrowly avoided a three-day losing streak in volatile trading on Wednesday, as optimism over a new Federal Reserve chief was trumped by anxiety over the political gridlock in Washington.

President Obama officially nominated Janet Yellen to replace Ben Bernanke as chairman of the U.S. central bank. Yellen is widely perceived as being more moderate on monetary policy and investors expect her to take a slower path towards reducing the Fed's stimulus program of bond-buying.

(Read more: Cramer: Yellen 'everything our country has to offer')

The Dow Jones Industrial Average, which fell 159 points on Tuesday, closed 26 points ahead, led by AT&T and IBM. Earlier, the blue-chip index hovered near a three-month low and briefly broke below its 200-day moving average.

The S&P 500 squeezed out a small gain, while the Nasdaq posted its third day in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended below 20.

Among key S&P sectors, telecoms led the gainers, while consumer discretionary slipped.

In recent months most expected either Yellen or former Treasury Secretary Larry Summers to receive the Fed nomination. Summers was widely viewed to be Obama's favorite but after a massive campaign by economists and others making the case for Yellen, Summers dropped out of the race last month. If approved by the Senate, Yellen would be the first woman to head the central bank in its 100-year history.

"Ever since [Larry] Summers dropped out, Yellen's name was what people were expecting—so the market likes the nomination, but it wasn't necessarily a surprise," noted Joe Bell, senior equity analyst at Schaeffer's Investment Research. "Also, the ongoing woes of Washington are taking attention away from Yellen's nomination."

Meanwhile, minutes from the Fed's latest meeting in September showed that the central bank's decision not to scale back bond-buying program was a "relatively close call" for policymakers.

"All members but one judged that it would be appropriate for the Committee to await more evidence that progress would be sustained before adjusting the pace of asset purchases," according to the minutes.

Given how weak the economy has been, "it was surprising to me that it was so close a call. However, Fed presidents have spent the last few weeks telling us it was close, so this isn't really news for the market," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange. "What is interesting: there does not seem to have been much discussion about the debt ceiling. The market at the time was aware of it, but it doesn't seem the Fed talked much about it, at least based on the minutes.''

Meanwhile, with the shutdown in its ninth day, President Obama made plans to talk with Republican lawmakers at the White House.

Despite the bickering, Republicans and Democrats in Congress saw signs of hope as members of both parties floated the possibility of a short-term increase in the debt limit to allow time for broader negotiations on the budget.

"People would rather be sitting on the sidelines when they don't know what to expect—The longer this drags out, the more uncertainty the market faces," said Bell. "You can look at technicals or short-term sentiment, but this is a very new-driven environment and until we get some more clarity from DC, we don't see a ton of volume in this market."

Meanwhile, crude oil prices dropped to close at a 3-month low. Earlier, data from the U.S. Energy Information Administration showed U.S. crude inventories shot up nearly 7 million barrels last week, their largest weekly gain since September 2012.

Third-quarter earnings are expected to grow 4.3 percent, while revenue is estimated to gain by 3 percent, according to the latest data from Thomson Reuters.

The Treasury auctioned $21 billion in 10-year notes a a high yield of 2.657 percent. The bid-to-cover ratio, an indicator of demand, was 2.58. Benchmark 10-year Treasury notes were last down 6/32 in price to yield 2.658 percent.

On the economic front, mortgage applications climbed last week as demand for refinancing outpaced purchases, according to the Mortgage Bankers Association.

Wholesale trade data will not be released on Wednesday, as scheduled, due to the government shutdown.