The stock market ended a strong week with modest gains after investors found good news in the Federal Reserve's decision to begin dismantling emergency lending measures for banks.
Stocks initially fell in response to the Fed's announcement late Thursday that it is raising the rate it charges banks for emergency loans, known as the discount rate. Stocks turned higher in late morning trading as investors saw the Fed's move as a vote of confidence that the financial system was recovering and that banks didn't need as much support.
A tame report on consumer prices brought reassurance that the Fed would be able to hold down more important rates for consumers and business loans.
The Dow Jones industrial average edged up only 9 points but recorded its best week in more than three months.
"The Fed certainly isn't exiting the easy money policy door yet," said Burt White, chief investment officer at LPL Financial. "They have their coats and boots on."
The central bank didn't change its more widely used federal funds rate, which is a benchmark for short-term interest rates.
Jay Leupp, president of Grubb & Ellis AGA mutual funds, said it was "inevitable" that the Fed would raise the discount rate. However the timing and size of future rate hikes for both the discount rate and the federal funds rate are still up in the air, he said.
"It's a warning sign, but don't expect more to happen soon," Leupp said.
The focus on rates comes as investors examine the state of the U.S. economy after weeks of concerns about overseas economies. Upbeat reports on the manufacturing and industrial industries, as well as another round of strong corporate earnings reports boosted hopes that a recovery is on track.
Starting last month, investors began worrying that debt problems in Greece and other European nations as well as China's move to curb its economic growth would hurt a global rebound.
The Dow rose 9.45, or 0.1 percent, to 10,402.35, its highest finish in a month. The Dow is now down only 0.25 percent for the year.
The broader Standard & Poor's 500 index rose 2.42, or 0.2 percent, to 1,109.17, while the Nasdaq composite index rose 2.16, or 0.1 percent, to 2,243.87.
Three stocks rose for every two that fell on the New York Stock Exchange, where volume came to 1.1 billion shares, compared with 960 million Thursday.
For the week, the Dow rose 303 points, or 3 percent. It was the second straight weekly gain and the strongest point and percentage increase since the week ended Nov. 6.
The S&P 500 index rose 3.1 percent, while the Nasdaq gained 2.8 percent. U.S. markets were closed Monday for President's Day.
Bond prices rose, pushing yields lower, after a benign report on inflation. Rising prices cut into returns of fixed-income investments. The yield on the benchmark 10-year Treasury note fell 3.79 percent from 3.81 percent late Thursday.
The dollar mostly rose against other major currencies. Gold and oil both rose.
On Friday, the markets slowed in late morning as traders watched golfer Tiger Woods' televised remarks about his recent affairs. Volume on the New York Stock Exchange leveled off during Woods' remarks, then picked up momentum after he was finished.
Stock in Nike Inc., one of Woods' biggest sponsors, was down about 19 cents as he spoke, then regained some ground. It ended down 9 cents at $64.35.
In economic news, the Labor Department said the Consumer Price Index rose by a smaller-than-expected 0.2 percent in January. Excluding food and energy, the index actually slipped 0.1 percent, its first monthly drop in 27 years.
"This allows the Fed to keep rates lower for longer," said Frank Ingarra, co-portfolio manager at Hennessy Funds, referring to the CPI report.
A report from the Mortgage Bankers Association provided mixed news about the housing market, which has shown recent signs of stabilizing. The group said the number of borrowers falling behind on their mortgage payments for the first time dropped sharply during the fourth quarter. However a record number of people remain behind on payments or in foreclosure.
The Russell 2000 index of smaller companies rose 2.30, or 0.4 percent, to 631.62.
Overseas, Britain's FTSE 100 rose 0.6 percent, Germany's DAX index gained 0.7 percent, while France's CAC-40 rose 0.6 percent. Japan's Nikkei stock average fell 2.1 percent.