Stocks stage rally

Quick Vote

How much higher are oil prices going?

• $110 a barrel or higher
• Higher, but not more than $110
• This is the high, it's downward from here

or View results

Video

More video

Hewlett-Packard is one of the few bright spots in the markets after reporting strong earnings. Play video

---

Oil prices trading near record highs have added to the woes facing the US economy. Play video

NEW YORK (CNNMoney.com) -- Stocks jumped Wednesday as investors welcomed the Federal Reserve's stance that the economy can avoid a recession, despite slower growth, rising unemployment and more pricing pressures.

Investors seemed to take in stride a spike in oil prices to a record settle of $100.74 a barrel.

The Dow Jones industrial average (INDU) added 0.7% and the broader Standard & Poor's 500 (SPX) index added 0.8%. The Nasdaq composite (COMP) gained 0.9%.

Thursday brings economic news on jobless claims, leading economic indicators, manufacturing in the Philadelphia region and weekly oil inventories.

Stocks had slumped Wednesday morning after an increase in consumer prices raised worries about inflation and the Fed's ability to keep cutting interest rates amid the spiking oil prices.

But those concerns were set aside in the afternoon, with investors scooping up some of the stocks that were hardest hit in the recent selloff, including retail and financial shares. Technology shares responded to Hewlett-Packard's strong earnings and outlook.

The advance was as much a response to the recent weakness as to anything in the Fed minutes, said Art Hogan, chief market analyst at Jefferies & Co.

"There were no major surprises in the Fed minutes and it felt like we were getting oversold, so a lot of computer-generated buy programs kicked in," he said.

Eye on the Fed. At around 2:00 p.m. ET, the Fed released the minutes from the last two policy meetings. The first was the emergency meeting on Jan. 22 in which the bank voted to cut the fed funds rate, a key overnight lending rate, by three-quarters of a percentage point. The second was the meeting that ended Jan. 30, in which the central bank cut the fed funds rate by an additional half-percentage point.

The minutes showed that the central bankers saw that the economy had weakened, that conditions in the labor market had deteriorated and that pricing pressures were growing.

In addition to the minutes, the Fed released its updated economic outlook for 2008 through 2010. The bankers now expect a bigger 2008 slowdown than their last reported forecasts in October. Looking to 2009, they expect real GDP growth to gain speed and by 2010 for it to accelerate further.

The growth estimates are attributed to bets on a gradual recovery in housing, the stabilization of financial markets post-credit crisis and the impact of lower interest rates as a result of the rate-cutting campaign.

"Right now the Fed is saying that they understand the gravity of the situation and they are leaving themselves open in terms of what they are going to do," said Douglas Roberts, chief investment strategist at Channel Capital Research.

He said that further Fed action will be influenced by the data, as always, but especially on the upcoming unemployment reports and what happens with oil prices.

Inflation worries grow. The consumer price index (CPI), rose 0.4% in January, matching December's rise and surprising economists who were looking for CPI to rise just 0.3%. So-called "core" CPI, which eliminates volatile food and energy prices, rose 0.3% in the month, after growing 0.2% in December. Economists thought core CPI would edge up 0.2% again in January.

The CPI report - paired with the recent run up in both oil and gold prices - exacerbated worries that the slow-growing economy may now also have to contend with higher pricing pressure.

Should inflation stay strong, this would limit the Federal Reserve's ability to continue cutting interest rates, something the stock market is expecting. The Fed has cut rates five times since September in an attempt to keep the economy out of recession amid the credit and housing market crises. The central bank has also loaned billions of dollars to commercial banks through a series of auctions aimed at boosting liquidity.

While the loans have already had an impact, the rate cuts are expected to begin working their way through the system later in the year, helping the economy stave off a bigger slowdown. But the flip side of lowering rates is that it tends to boost inflation, and if pricing pressure is already an issue, as the CPI and oil prices would suggest, the Fed's ability to keep cutting rates could be limited.

"I think the CPI this morning continues a theme that inflation remains elevated and remains at levels above both the Fed and the investor's comfort level," said Douglas Peta, market strategist at J. & W. Seligman.

He said that the question is whether this is a temporary development that will improve as the economy continues to slow down, or whether it's something more substantial.

Regardless, the report seems to change people's calculations of what the Fed might do going forward, Peta said, noting that the Fed can't treat both slowing growth and rising inflation at the same time.

"The Fed sees a clear and present danger in credit markets and it's going to keep addressing those issues for now," he said, with more rate cuts expected at the next meeting. But beyond the March Fed meeting, "maybe we'll start to see it consider inflation as much as growth."

Another report showed that January housing starts grew, although less than expected, while January building permits fell less than expected. The report also showed that new construction of single-family homes fell to a 17-year low. (Full story).

Oil not far from record. Stocks ended lower Tuesday after crude oil prices spiked to a record settle of $100.01 per barrel on worries about potential OPEC production cuts paired with the fallout from a Texas refinery fire.

Oil retreated a bit off those highs for much of Wednesday's session, before gaining steam in the afternoon with oil for March delivery hitting a trading record of $101.32 on the New York Mercantile Exchange before ending just short of that at $100.70.

Corporate news. Hewlett-Packard (HPQ, Fortune 500) reported higher fiscal first-quarter sales and earnings that topped forecasts late Tuesday. The personal computer and printer maker also boosted its current-quarter profit outlook. Shares jumped 7.9% Wednesday, boosting the Dow industrials, of which HP is a component, and the tech-fueled Nasdaq composite.

Hewlett-Packard helped support the tech sector. Other big tech gainers including IBM (IBM, Fortune 500), Dell (DELL, Fortune 500), Oracle (ORCL, Fortune 500) and Applied Materials (AMAT, Fortune 500).

Telecoms were again under pressure on competitive worries.

On Tuesday, Dow components AT&T (T, Fortune 500) and Verizon Communications (VZ, Fortune 500) tumbled after the two companies announced dueling unlimited calling plans, with investors worried about how the plans will impact profitability.

AT&T dropped another 4.3% Wednesday after Credit Suisse downgraded it to "neutral" from "outperform," citing the weakening economy and increased competitive pressures. Verizon shares had dipped in the morning, but managed to end the session with minimum declines.

KKR Financial (KFN), a listed arm of private equity firm Kohlberg Kravis Roberts & Co. has delayed repaying billions in debt amid the credit market fallout. The company is in restructuring talks with its creditors.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by over three to two on volume of almost 1.47 billion shares. On the Nasdaq, advancers topped decliners 4 to 3 on volume of 2.30 billion shares.

Other markets. Treasury prices inched higher, lowering the yield on the benchmark 10-year note to 3.89% from 3.9% late Tuesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and the yen.

COMEX gold for April delivery rose $8 to settle at $934.60 an ounce.