US stocks rise as financials prosper

US stocks soared today as investors welcomed strong earnings from financial services companies, upbeat economic data and some reassuring news from the Federal Reserve.

The Fed’s decision to raise short-term interest rates by another quarter-percentage point to 1.75% did not come as a surprise to the market. The widely anticipated decision and the statement issued alongside it were viewed as a signal that the central bank sees continued improvements in the economic outlook and inflation.

“I think it’s basically a pretty positive statement,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “I doubt that this hike, which was widely expected, will have any meaningful impact on the economy, but it will have a positive psychological effect on the market, because it is reassuring the world that the economy is doing better.”

The Dow Jones industrial average closed up 40.04, or 0.4%, at 10,244.93.

The broader gauges were also higher. The Standard & Poor’s 500 index added 7.10, or 0.6%, to 1,129.30, its highest close since July 1.

The Nasdaq composite index gained 13.10, or 0.7%, to 1,921.17, its best finish in two months.

In economic news, the Commerce Department reported robust housing construction last month. The 2 million-unit pace of housing construction clocked for August was the highest level of activity in five months, and far outpaced the decline economists were expecting. July’s housing figures were revised upward.

The upbeat economic data reinforced Fed Chairman Alan Greenspan’s view that the economy is on firmer footing since striking a soft patch in the late spring.

In the statement issued Tuesday, the Fed said “output growth appears to have regained some traction, and labour market conditions have improved modestly.”

With inflation expected to remain low despite rising energy prices, Greenspan and the other Fed governors said they believe “policy accommodation can be removed at a pace that is likely to be measured,” language they have used before, which economists interpret to mean rates will continue to rise at a gradual pace.

Most economists believe the federal funds rate – the rate banks charge each other on overnight loans – will go up another quarter-percentage point after the presidential election in November. Beyond that, the predictions become more cloudy.

Persistently high energy prices still continue to weigh heavily on investors’ minds. Global supply concerns were further exacerbated by Russian oil giant Yukos’ announcement that it would halt shipments to China due to financial troubles related to its ongoing fight with Moscow over back taxes.

Light sweet crude for October delivery settled up 75 cents at 47.10.

“The markets seem to be accepting prices over 40 a barrel – if they were to move back to 50 and higher we could see some setbacks, but oil prices at these higher levels have not had a major impact in pushing up inflation so far,” said Lynn Reaser, chief economist and senior market strategist, Banc of America Capital Management.”

The economy, the third quarter, is doing better than many had feared. We still are in a very early part of the earnings warning season, and we’re likely to see some mixed results, but the third quarter economic performance looks to be quite strong.”

Goldman Sachs added 3.22 to 94.90 after posting a 30% jump in profits for the latest quarter, helped by strong growth across its segments.

Earnings per share of 1.74 surpassed the 1.43 per share forecast by analysts surveyed by Thomson First Call.

Among decliners, General Mills fell 98 cents to 45.35 after the cereal maker reported a 19% dip in earnings due to higher prices for ingredients and restructuring costs.

The company has raised prices of its products to reflect higher commodity prices, but the effect is only now being felt -results for the next quarter are expected to be stronger.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange.

The Russell 2000 index, which tracks smaller company stocks, was up 6.18, or 1.1%, at 576.92.