Stocks Bob as Investors Digest Fed Statement

Cindy Perman|

Stocks pulled back slightly Wednesday after the Fed said the economy was improving and it planned to gradually slow the pace of Treasury buying.

Stocks had ralllied for much of the day after some good news on the economy front,  including a report that showed existing-home sales — and home prices — have started to rise.

The Dow Jones Industrial Average was up about 100 points, or 1.1 percent, after the Fed statement, compared with about 140 points before the statement.

This came after the market's 1-percent declineTuesday, its biggest drop in more than a month, which was largely due to profit-taking and a drop in bank stocks after a weak prognosis for the sector from a well-known analyst.

The Federal Reserve said "economic activity is leveling out" and "conditions in financial markets have improved further in recent weeks." The Fed is extending its Treasury-buying program through the end of Octoberbut said it intends to "gradually slow the pace of these transactions." (Read the full text of the Fed statement.)

In the June statement, the

"In June, the phrase was “the pace of economic contraction is slowing”. While that may not seem like a lot, it is. That the economy is leveling out indicates to me the members believe the recession is basically over. That should be viewed positively by investors.

Existing-home sales rose 3.8 percent to an annual rate of 4.76 million in the second quarter, the National Association of Realtors reported. And the median sales price rose 4 percent to $174,100 in the second quarter from the first, though prices are still down nearly 16 percent from a year ago.

Toll Brothers also delivered some much-needed good news on the housing sector. The homebuilder projected a 42-percent drop in third-quarter revenue but said the number of contracts signed increased for the first time in 16 quarters.

Toll Brothers shares jumped nearly 10 percent. Lennar, Beazer and Pulte were all up more than 5 percent.

Mortgage applications fell 3.5 percent, however,as rising mortgage rates depressed refinancing demand. And the trade gap widened in June to $27 billionas higher prices on oil imports offset gains in exports.

Today's Treasury auction of $23 billion in 10-year notes was met with mediocre demand. The high yield was 3.734 percent, and the bid-to-cover ratio was 2.49, in line with the recent average of 2.48. This latest round will conclude tomorrow with a 30-year auction.

Next up, investors are awaiting the Fed statement, due out at 2:15pm, following a two-day meeting of policy makers.

While it's widely expected they'll keep interest rates near zero, Wall Street is anxious to hear the Fed's latest take on the economy, and will be looking for any hints of an exit strategy to the extraordinary measures taken by the government to deal with the financial crisis.

As the Fed begins the second day of its two-day meeting, some good news for chairman Ben Bernanke: a Wall Street Journal survey shows nearly unanimous agreement among economists that Bernanke should be reappointed to another term as chairman, and a 71 percent chance that President Obama will ask him to do so. And most of the economists surveyed said the recession is over.

AIG shares rose after the insurer agreed to sell its Hong Kong consumer finance and India-based IT services units.

In earnings news, retailer Macy's beat expectations, helped by cost-cutting efforts, but fell short with its full-year outlook.

And Sara Lee , which makes everything from coffee cakes to Jimmy Dean sausages, also topped forecasts.

Applied Materials , the biggest maker of semiconductor manufacturing equipment, reported a smaller-than-expected loss after the bell Tuesday and delivered an upbeat forecast for the current quarter.

- Peter Schacknow contributed to this report.

Still to Come:

WEDNESDAY: Fed announcement; Earnings from Macy's
THURSDAY: Retail sales; weekly jobless claims; import/export prices; business inventories; Treasury 30-year auction; Earnings from Wal-Mart, Kohl's and Nordstrom
FRIDAY: CPI; industrial production; consumer sentiment; Earnings from JCPenney

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