Wall St climbs on expectations for modest Fed taper

Investors expect Fed to announce scale-back of purchases by $10 billion a month to $75 billion

US stocks advanced on Tuesday on expectations the Federal Reserve will make only moderate changes to its stimulus that has been highly supportive of stocks and other assets at the conclusion of its two-day meeting.

The policy-setting Federal Open Market Committee began meeting on Tuesday to discuss whether to trim its bond purchases, or quantitative easing. Many investors expect Fed chairman Ben Bernanke will announce a scale-back of purchases by $10 billion a month to $75 billion, while keeping rates close to zero.

"The appears to be what investors are looking for, as long as the taper is not bigger than people were expecting the market will react positively," said Paul Mangus, head of equity research and strategy at Wells Fargo Private Bank in Charlotte, North Carolina.

"The Fed is very aware of how they believe investors will react. They've been very skillful about trying to manage expectations."

A statement with the FOMC's decision will be released on Wednesday afternoon, followed by a Bernanke news conference.

The Dow Jones industrial average rose 34.95 points or 0.23%, to 15,529.73, the S&P 500 gained 7.16 points or 0.42%, to 1,704.76 and the Nasdaq Composite added 27.853 points or 0.75%, to 3,745.699.

The S&P 500 closed above the key resistance level of 1,700 for the first to since August 5 and is 0.3% below its record high of 1,709.67.

US consumer prices barely rose in August, but gains in rents and medical costs pointed to a stabilization in underlying inflation that could allow the Fed to scale back stimulus.

Adding to investor confidence, crude prices continued to fall as a deal averting a US-led attack on Syria calmed fears of a Middle East oil supply disruption.

Brent settled down 1.7% to $108.19 and is down 2.5% in the past two days. US crude settled down 1.1% on the day at $105.42 a barrel.

Easing oil prices helped boost airline stocks, along with a JP Morgan upgrade of Delta Air Lines Inc and US Airways Group Inc , to "overweight" ratings. Delta shares rose 0.7 to $23.32 while US Airways climbed 3.6% to $18.72. The NYSEArca airline index gained 1.2%.

Apple shares , which Monday closed below their 200-day moving average for the first time since August 12, rose 1.2% to $455.32. The stock had fallen more than 11% in the prior five sessions after investors were disappointed by the new products and prices introduced last week.

Pandora Media Inc shares reversed course after early declines and closed up 5% at $25.19, a day after the company warned that its business growth is slowing and proposed a follow-on offering of 10 million shares.

Microsoft shares edged up 0.4% to $32.93 after the company said it would raise its quarterly dividend by 22%.

Shares of Aeropostale Inc surged 18.1% to $10.17 after Sycamore Partners reported a 7.96% holding in the teen apparel retailer. The S&P retail index gained 0.9%.

Safeway shares jumped 10.5% to $30.99 after the company adopted a stockholder rights plan. Activist investor Jana Partners disclosed a 6.2% stake in the grocery chain and said it has held discussions with management about reviewing strategic alternatives.

Volume was light with about 5.06 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, below the daily average of 6.23 billion.

Advancing stocks outnumbered declining ones on the NYSE by 2,006 to 981, while on the Nasdaq, advancers beat decliners 1,708 to 799.