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Stocks rise as Fed meets

Indexes advance as investors welcome Lehman earnings, PPI report, gear up for expected interest rate cut.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Stocks gained Tuesday morning as investors welcomed Lehman Brothers' earnings and a mild reading on inflation while awaiting the results of the Federal Reserve policy meeting.

The Dow Jones industrial average (up 81.29 to 13,484.71, Charts) and the broader S&P 500 (up 9.20 to 1,485.85, Charts) index both gained around 0.7 percent nearly 90 minutes into the session. The tech-heavy Nasdaq composite (up 10.27 to 2,591.93, Charts) rose 0.5 percent.

Stocks slipped Monday as investors mulled slightly hawkish comments from former Fed chairman Alan Greenspan ahead of Tuesday's big Fed policy meeting.

But the tone was more positive Tuesday morning, thanks to a variety of developments - and expectations that the central bank will vote to cut interest rates later today. The extent of the cut is in question, with some market participants looking for a quarter-percentage point and some looking for a half. (For more details, click here).

Lehman Brothers (up $1.73 to $60.35, Charts, Fortune 500) reported a narrower-than-expected decline in quarterly income, with strength in its investment banking and management units tempering losses in its fixed-income unit. That unit was hit by the impact of the subprime mortgage fallout and credit market crisis.

Less fortunate was discount brokerage E-Trade (down $0.87 to $13.34, Charts), which after the close Monday cut its profit outlook, saying that tighter credit conditions will force it to get out of businesses that don't deal directly with retail investors. Shares fell 6 percent Tuesday.

A report Tuesday morning showed that the number of foreclosures jumped in August, reflecting the impact of subprime adjustable rate loans resetting.

On a more positive note, prices paid at the wholesale level fell more than expected in August, according to the Producer Price Index (PPI), released early Tuesday. The so-called core PPI, which strips out volatile food and energy, rose a bigger-than-expected 0.2 percent.

The report was especially welcomed by investors due to worries that the risk of higher inflation could limit the Fed's ability to cut interest rates.

The fed funds rate has stood at 5.25 percent since June 2006, as the Fed has sought to balance inflationary pressure with the threat of an economic slowdown sparked by the housing market collapse.

But the recent rise in mortgage defaults and the tightening of credit have raised expectations on Wall Street that the central bank will have to cut interest rates so as to keep financial markets stable.

The Fed has maintained that it is not the central bank's responsibility to bail out investors adjusting to a different level of risk. However, they are also not going to let the financial markets flounder.

The Fed has already cut the discount rate, which affects bank loans, by a half-percentage point. The Fed has also been pumping billions into the banking system in temporary overnight reserves, so as to keep liquidity flowing.

Now investors are looking for the central bank to cut the fed funds rate, which impacts consumer loans.

A decision is expected Tuesday at around 2:15 p.m. ET.

Stock gains were pretty broad based, with 24 out of 30 Dow stocks rising, including Alcoa (up $0.40 to $35.63, Charts, Fortune 500), Caterpillar (up $1.22 to $74.91, Charts, Fortune 500), 3M (up $1.05 to $89.98, Charts, Fortune 500) and General Electric (up $0.44 to $40.62, Charts, Fortune 500).

Among other movers, Best Buy (up $1.70 to $46.24, Charts, Fortune 500) jumped after the electronics retailer reported quarterly sales and earnings rose from a year ago and topped forecasts, thanks to strong sales and a stock buyback program.

Grocery chain Kroger (up $1.96 to $28.98, Charts, Fortune 500) reported higher quarterly sales and earnings and lifted its profit outlook for the rest of the year. Shares jumped 7 percent in unusually active New York Stock Exchange trade.

Treasury prices fell, pushing the yield on the 10-year note to 4.49 percent from 4.46 percent late Monday. Bond prices and yields move in opposite directions.

U.S. light crude oil for October delivery fell 10 cents to $80.47 a barrel on the New York Mercantile Exchange after ending at a record close of $80.57 on Monday. However, the record price is still below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

COMEX gold for December delivery rose $1.50 to $725.30 an ounce. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.