NEW YORK (CNN/Money) -
U.S. stock markets closed higher Tuesday, but well off their best levels, after the Federal Reserve changed the wording of its statement to imply that interest rates will rise, as has been expected, but will do so gradually.
The Nasdaq composite (up 11.70 to 1950.48, Charts) gained 0.6 percent, the Standard & Poor's 500 (up 2.00 to 1119.55, Charts) index gained 0.2 percent and the Dow Jones industrial average (up 3.20 to 10317.20, Charts) closed near unchanged. Treasury prices tumbled.
All three had rallied soundly in the hour following the release of the Federal Reserve's 2:15 p.m. announcement, but lost a chunk of their gains near the close. The major indexes had been flat to weaker prior to the Fed news.
As expected, the Federal Reserve opted to keep the federal funds rate steady at 1.0 percent, a more than 40-year low, Tuesday.
The central bank also hinted rates were set to rise. It dropped its reference to being "patient" and said its accommodative stance "can be removed at a pace that is likely to be measured." The Fed also changed its view on inflation, saying essentially that the risks of inflation and deflation are balanced.
"The two issues regarding rates that have been in front of the markets for weeks have been 'when will rates rise, and by how much?,'" said Timothy Ghriskey, chief investment officer at Solaris Asset Management.
"The statement today seemed to throw water on some of those issues, with the implication that tightening won't start as quickly as some have feared, and perhaps the increases won't amount to all that much," he added, "all of which is positive for the market."
While the market seemed to take the statement as a positive, with a rise in rates this year now essentially confirmed, investors turned their focus to the next spate of reports for hints about when the rise might happen.
Friday's April employment report will certainly be scrutinized for such hints. Due shortly before the open, Friday's report is expected to show that employers added 165,000 new jobs to their payrolls last month, according to a Briefing.com survey of economists. Employers added 308,000 jobs to their payrolls the previous month. The unemployment rate is thought to have held steady at 5.7 percent, unchanged from the previous month.
Ahead of that, Wednesday brings the report from the Institute for Supply Management on the services sector of the economy. The services index is expected to have fallen to 65.0 in April from 65.8 in March, although still above the key 50 level, which indicates expansion in the sector.
Market reacts to the Fed
The Fed's statement seemed to provide the market with the "Goldilocks" scenario it likes so much, with the implication that the economy is growing, and as such, rates will need to rise from their current lows, but inflation is not a huge problem that is apt to threaten the recovery.
The market seemed to take the wording as a sign that rates won't rise until August. Wall Street lately has grown reasonably comfortable with the idea that rates will be rising this year, due to the improved March payrolls report and other recent economic news.
Prior to Tuesday's comments, Fed funds futures contracts showed the likelihood of a quarter-percentage point rise in August, but some Fed watchers speculated that it could happen sooner, perhaps in June. The statement seemed to imply there was no rush to raise rates.
The morning economic news seemed to confirm other recent trends -- namely that the economic news continues to improve. The March factory orders report showed an increase of 4.3 percent against expectations for a gain of 2.4 percent after a 0.3 percent rise in February.
What moved?
Gains in semiconductors and networkers lifted the Nasdaq and kept the broader market from declines. Among the Nasdaq's gainers, Intel (INTC: up $0.20 to $26.28, Research, Estimates) added around 1 percent, Cisco Systems (CSCO: up $0.20 to $21.37, Research, Estimates) added just over 1 percent and Applied Materials (AMAT: up $0.50 to $18.65, Research, Estimates) added nearly 3 percent.
Nortel Networks (NT: up $0.60 to $3.98, Research, Estimates) surged 17 percent and topped the New York Stock Exchange's most-actives list, bouncing back after plunging 30 percent last week on news that it fired its CEO and some other executives in conjunction with previously announced accounting irregularities. On Tuesday, the company said it extended its previous deal with Charter Communications (CHTR: down $0.00 to $4.00, Research, Estimates) for Charter to use Nortel's voice over Internet Protocol (VoIP) products.
Companies that reported upbeat earnings generally saw their stock prices rewarded.
Tyco International (TYC: up $1.09 to $29.07, Research, Estimates) gained 4 percent after the company reported higher quarterly earnings that topped estimates and raising its current quarter results, due to strength in a number of its businesses.
Macrovision (MVSN: up $5.10 to $22.74, Research, Estimates), which makes software that protects products from piracy, added almost 30 percent in active Nasdaq trade after reporting earnings late Monday that grew from a year earlier and topped expectations due to stronger demand for its products.
The Dow lagged the broader market all session and closed little changed, after a brief attempt at a rally in late afternoon. Only components' Alcoa (AA: up $0.77 to $31.30, Research, Estimates) and J.P. Morgan Chase (JPM: up $0.45 to $38.31, Research, Estimates) closed solidly higher.
United Technologies (UTX: down $0.59 to $86.36, Research, Estimates) dipped modestly after the company's CEO said 2004 earnings will meet current estimates, with some investors perhaps hoping that the company would raise estimates.
Market breadth was positive. Some 1.66 billion shares traded on the New York Stock Exchange, with advancers topping decliners by five to three. Winners beat losers 12 to five on the Nasdaq, where 1.81 billion shares changed hands.
Treasury prices fell, with the 10-year note losing nearly 1/2 of a point in price, pushing its yield up to 4.56 percent from 4.50 percent late Monday. Treasury prices and yields move in the opposite direction. The dollar tumbled versus the euro and yen.
Among commodities markets, NYMEX light sweet crude oil futures rose 77 cents to settle at $38.98 a barrel. Earlier, in London, Brent crude hit a 13-year high. COMEX gold rallied $4.30 to settle at $391.80.
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