The Fed's rate decision is clearly the market's focus this week, and trading is marked by investors' conjectures about policymakers' thoughts on the weak economy and crunched financial industry. With an announcement not expected until Wednesday afternoon, the market in the meantime digested data on earnings, consumer spending and durable goods.

Investors did get some encouragement about the economy after the Commerce Department said orders for big-ticket items rose 5.2 percent in December, the widest jump in five months. In addition, the Conference Board reported consumer confidence fell in January — pretty much as expected.

Economic data will continue to be scrutinized as investors try to determine what the Fed's take is on the economy. Investors are angling for a half-point cut following its emergency three-quarter-point cut last week.

"The market is just in a holding pattern," said Todd Leone, managing director of equity trading at Cowen & Co. "It seems we've hit a short-term bottom, and the market has been stabilizing as we wait to hear what the Fed says."

According to preliminary calculations, the Dow Jones industrial average rose 96.41, or 0.78 percent, to 12,480.30. The blue chip index closed near its high of the day.

Broader indexes also rose. The Standard & Poor's 500 index rose 8.34, or 0.62 percent, to 1,362.30, and the Nasdaq composite advanced 8.15, or 0.35 percent, to 2,358.06.

Government bond prices fell as stocks rose, indicating that investors feel less need for the safety of Treasurys. The 10-year Treasury note's yield, which moves opposite its price, was at 3.66 percent, up from 3.58 percent late Monday.

The dollar was mixed against most major currencies, and gold prices fell.

Oil prices moved higher as traders waited to see what the Fed's next move will be. A barrel of light sweet crude rose 65 cents to $91.64 a barrel on the New York Mercantile Exchange.

Wall Street has been extremely volatile in recent weeks amid fears of a U.S. recession and further write-downs in the financial sector. However, that has given way to a more quiet tone this week as investors looked for their second-straight day of gains before the Fed's decision.

Central bankers are widely expected to lower its key rate, now at 3.5 percent, by as much as one-half percentage point to 3 percent when policy-makers wrap up on Wednesday. This will be the last meeting for seven weeks, but that doesn't rule out another emergency cut in the meantime.

Rate cuts are just one part of the central bank's plan to boost the economy. The Fed auctioned $30 billion in funds to commercial banks on Tuesday — the fourth time since last month it has provided cash-strapped banks with extra reserves.

The auction is designed to keep banks lending and prevent a severe credit squeeze from pushing the country into a recession. Global banks have lost about $141 billion since the credit crisis began last year.

But, all of this has done little to convince investors that Wall Street will return to the high levels seen in October anytime soon. Since most investors have priced in a rate cut, the market might still continue to trend lower until the economy shows signs the Fed's policy is working, analysts said.

"It is going to take a little time, and one thing people have to realize is that sometimes consolidation is healthy because the market can't run forever," said Ryan Larson, senior equity trader at Voyageur Asset Management. "Since October we've been worried about slower growth and rising inflation, and right now we're in a haze."

Consolidation over the past three months has certainly been dramatic. The Dow is down about 12 percent, or more than 1,700 points; the S&P has plunged 13 percent, or about 204 points; and the tech-heavy Nasdaq has lost about 507 points, or 18 percent.

Larson also said the market is scrutinizing corporate earnings, and what chief executives say about 2008. As American Express Co.'s fourth-quarter results indicated Monday, companies are being forced to prepare for a climate throughout 2008 of deteriorating credit and slower spending.

AmEx, the world's third-largest credit card brand, said its fourth-quarter profit fell 10 percent after socking away more cash in reserve to use in case cardholders can't pay back their debt. Shares rose 40 cents to $47.80.

In other corporate news, embattled mortgage lender Countrywide Financial Corp., which was recently bought by Bank of America Corp., posted a sharp loss, as expected, due to its missteps in subprime lending. Countrywide rose 36 cents, or 6.2 percent, to $6.31; BofA added 74 cents to $41.93.

The Russell 2000 index of smaller companies rose 2.81, or 0.40 percent, to 705.20.

Advancing issues led decliners by a 2-to-1 basis on the New York Stock Exchange, where volume came to 1.34 billion.