Stocks bumped higher after the Fed's announcement although investors had expected the rate hike to 3.5 percent, a four-year high. The Fed signaled that at least one more rate increase is coming, but many investors expect three more.

Wall Street was also soothed as crude oil futures fell to $63.07 a barrel, down 87 cents, on the New York Mercantile Exchange. Oil hit a record intraday high of $64.27 Yesterday following the announcement the U.S. embassy in Saudi Arabia would close for two days due to threats.

Investors also cheered Labor Department data showing work force productivity rose at a slower rate than it had in the first quarter. Labor costs also grew at a slower rate than the previous nine months. Analysts are looking for the economy to grow at a moderate pace, since torrid growth might lead to inflation and even more interest rate hikes than anticipated.

The Dow Jones industrial average rose 78.74, or 0.75 percent, to 10,615.67 after three days of losses.

Broader stock indicators also advanced. The Standard & Poor's 500 index rose 8.25, or 0.67 percent, to 1,231.38, and the Nasdaq composite index rose 9.80, or 0.45 percent, to 2,174.19.

Bonds rose, with the yield on the 10-year Treasury note at 4.39 percent, up from 4.42 percent late yesterday, the highest yield since April. The U.S. dollar was up against the euro in European trading. Gold prices were higher.

In its policy statement, the Fed repeated its previous view that "pressures on inflation have stayed elevated" but added that "core inflation has been relatively low in recent months and longer-term inflation expectations remain well-contained."

The market has spent most of the year nearly flat, which suggests investors are worried about energy costs, consumer spending, housing and the economy, in addition to interest rates, said Jeff Kleintop, chief investment strategist for PNC Financial Services Group in Philadelphia.

After strong second-quarter earnings and months of positive economic data, the market's consensus is that the Fed's rate hikes are justified. But, because of the other factors that could affect the economy, investors are split on whether the Fed's hikes will be enough to contain inflation without causing a recession.

"While the market has priced in three more rate hikes after today, what it is less sure of is if the Fed will be successful, no matter how many rate hikes," Kleintop said.

The market's bounce may have just been a matter of timing, said Peter Martin, senior technical analyst at Prudential Equity Group. "We had three or four down sessions. We were due for a bounce. But when you look at the complexion, the volume, the advancers versus decliners, it's a positive day, but it's not a runaway day."

In company news, May Department Stores Co. said its second-quarter profit fell by nearly half from the year before, hurt by expenses from its planned merger with rival Federated Department Stores Inc., the owner of Macy's and Bloomingdale's. The retailer's profits missed analysts' estimates by a wide margin. Its stock fell 13 cents to $40.07.

Cisco Systems Inc.'s fiscal fourth-quarter profits, reported after the close of trading, jumped nearly 12 percent as the leading network equipment maker continued to benefit from strong demand from its corporate customers. Excluding special items, the company met analysts' expectations. Its shares closed up 36 cents to $19.61, then rose an additional 10 cents a share in extended trading, hitting $19.71.

Blockbuster Inc. fell 92 cents to $7.09 after the nation's biggest movie-rental chain reported a second-quarter loss due to a revenue decline after it eliminated late fees. Adjusting for one-time items, the company missed analysts' estimates by 10 cents a share.

Shares of Time Warner Inc. rose 57 cents to $18.54 following a CNBC report that financier Carl Icahn is attempting to organize an investor group, potentially to advocate for the break up of the media conglomerate. Icahn has contacted hedge funds, institutions, and former Time Warner executive Ted Turner to gauge their interest in joining such a group, according to the report.

Shares of Delta Air Lines Inc. slid 28 cents to $1.95 after Merrill Lynch downgraded its stock to "sell", saying the latest jump in oil prices increases the chance the troubled airline will file for bankruptcy within two months.

Advancing issues led decliners by roughly 3 to 2 on the New York Stock Exchange where volume was 1.36 billion shares, even with yesterday.

The Russell 2000 index of smaller companies rose 0.88, or 0.13 percent, to 660.48.

Overseas, Japan's Nikkei stock average rose 1.03 percent. In afternoon trading, Britain's FTSE 100 was up 0.36 percent, Germany's DAX index was up 1.48 percent, and France's CAC-40 was up 1.14 percent.