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Dow, S&P log 3-day win streak amid Fed policy meeting; Nasdaq logs best close in 13 years

Stocks closed higher Tuesday, with the Dow and S&P 500 finishing in positive territory for the third-straight session, as Federal Reserve policymakers kicked off their two-day meeting.

(Read more: After-hours buzz: Adobe, EA, Symantec & more)

Investors expect the central bank to scale back purchases by $10 billion a month while keeping rates close to zero for some time.

"Everyone's waiting until tomorrow to see what the Fed does–but the market's still up today so investors seem to be comfortable with the $10 billion [curb]," said Paul Hogan, co-manager of the FAM equity-income fund.

(Read more: Siegel: 'Some juiceleft in this market')

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The Dow Jones Industrial Average climbed 34.95 points to finish at 15,529.73, closing in positive territory for a third session. The blue-chip index is on track for its second-best monthly gain of 2013.

The S&P 500 gained 7.16 points to end at 1,704.76, finishing above 1,700 for the first time since Aug. 5. The index is set to post its strongest first three quarters of a year since 1997. The Nasdaq rallied 27.85 points to close at 3,745.70.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed above 14.

Most key S&P sectors ended higher, lifted by techs and industrials.

After weeks of speculation, the Fed is expected to announce that it will start tapering off asset purchases in September, cutting back from $85 billion per month to $70 billion to $75 billion. The FOMC meeting statement will be released on Wednesday afternoon followed by Fed Chairman Ben Bernanke's news conference.

(Read more: Trading the Fed taper: Avoid the dollar)

"We continue to think that the FOMC (Federal Open Market Committee) will announce a reduction in those purchases on Wednesday," wrote analysts at Capital Economics.

"Given how far bond yields have risen in recent months in response to this prospect, we doubt that there would be a particularly adverse market reaction. Indeed, we wouldn't be surprised if yields fell back a bit more in the coming months. Nonetheless, we still think that yields will ultimately drift slowly up again over the next couple of years as the Fed gradually becomes less accommodative."

(Read more: Questions over Fed chief a bigger issue than taper)

U.S. Treasury debt prices traded near flat. Benchmark 10-year Treasury notes were little changed in price with a yield of 2.860 percent, while two-year notes held steady in price, yielding 0.391 percent.

Over the weekend, Larry Summers pulled out of the race to be the next head of the Federal Reserve, propelling equities around the world Monday. Summers' surprise decision bolstered risk appetite as investors had expected him to take a more hawkish course regarding stimulus than other candidates, if appointed.

On the economic front, homebuilder sentiment index remained unchanged in September after four straight months of gains, according to the National Association of Home Builders. Still, most homebuilders rallied, led by Beazer and Meritage Homes.

Consumer prices ticked up 0.1 percent in August as the cost of energy fell, according to the Labor Department.

Among techs, Microsoft gained after the tech giant boosted its dividend by 22 percent to 28 cents a share and set a new $40 billion buyback.

(Read more: Cramer: Microsoft's dividend is a desperate move)

The percentage of stocks paying dividends in the S&P 500 is at its highest level in the past 15 years at 83 percent, according to the most recent data from FactSet. The payout ratio, at 31.8 percent, is the highest since mid-2010.

Facebook surged nearly 6 percent to close above $45.

Intel rose after Credit Suisse raised its target price on the tech company to $30 from $28.

Pandora slumped after the Internet radio company proposed a follow-on offering of 10 million share for capital expenditures.

Aeropostale rallied after private equity firm Sycamore Partners disclosed that it had taken an 8-percent stake in the teen clothing retailer, according to a regulatory filing. Rivals Abercrombie & Fitch and American Eagle Outfitters also traded higher.

Outerwall plunged after the operator of video game and movie kiosks, formerly known as Coinstar, cut its current-quarter and full-year earnings and revenue estimates.

Among earnings, Adobe Systems is expected to post earnings after the closing bell.

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

On Tap This Week:

WEDNESDAY: Mortgage applications, housing starts, oil inventories, FOMC mtg announcemnet, FOMC forecasts, Bernanke press conference, Apple iOS 7 available; Earnings from FedEx, General Mills, Oracle
THURSDAY: Jobless claims, current account, existing home sales, Philadelphia Fed survey, leading indicators, natural gas inventories, Fed's Pianalto speaks, Fed balance sheet/money supply, Microsoft analyst mtg, Nike shareholder mtg, weekly rail numbers; Earnings from ConAgra, Rite Aid
FRIDAY: Fed's George speaks, Fed's Bullard speaks, Fed's Kocherlakota speaks, quadruple witching, new iPhones in stores

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