Wall Street rallies over 1 percent ahead of Fed decision

By Noel Randewich

(Reuters) - U.S. stocks rallied more than 1 percent on Tuesday after data showed healthy growth in consumer spending but did little to remove uncertainty about whether the Federal Reserve will end seven years of near-zero interest rates when it meets this week.

Speculation about when the Fed will begin to raise rates has dogged Wall Street for several months, with the picture complicated by recent market turbulence that some see as justification for the central bank to hold off.

"The debate around the Fed continues but the Fed will do more damage waiting for December to raise rather than start the normalization process," said Art Hogan, chief market strategist at Wunderlich Securities.

"If they don't raise rates this week, it's a bad signal."

The Commerce Department said core retail sales rose 0.4 percent in August after an upwardly revised 0.6 percent increase in July. It was the latest sign of sturdy economic momentum and suggested the recent stock market sell-off had little immediate impact on U.S. household spending.

U.S. interest rates futures implied traders place a 27 percent chance the Fed would end its near-zero interest rate policy on Thursday , up from 23 percent late on Monday, according to CME Group's FedWatch program.

"It's tough to call," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois. "In the context of the world economy and the uncertainty around China, they might give it another month."

Around 3:20 p.m. ET (1920 GMT), the Dow Jones industrial average rose 256.71 points, or 1.57 percent, to 16,627.67, the S&P 500 gained 28.08 points, or 1.44 percent, to 1,981.11 and the Nasdaq Composite added 60.60 points, or 1.26 percent, to 4,866.36.

All 10 major S&P sectors were up, with the industrials index's <.SPLRCI> 1.64 percent gain leading advancers.

GE rose 2.44 percent and Microsoft jumped 2.67 percent, both making the biggest contributions to the S&P's rally.

The financial index <.SPSY> rose 1.65 percent, led by JPMorgan's 2.15 percent rise.

Stocks have been volatile since China devalued its currency in August. The S&P 500 has had moves of at least 1 percent in more than 10 sessions since Aug. 20 and is down 4 percent for the year.

Shares of Fiat Chrysler Automobiles rose 2.9 percent after the United Auto Workers union said it will keep talking with the automaker to reach a new contract for the company's U.S. factory workers, delaying a possible strike at its most profitable operations.

Gray Television jumped 13.71 percent after the broadcaster said it would buy Schurz Communications' television and radio stations for $442.5 million.

Advancing issues outnumbered decliners on the NYSE by 2,131 to 891. On the Nasdaq, 1,942 issues rose and 837 fell.

The S&P 500 index showed three new 52-week highs and five new lows, while the Nasdaq recorded 37 new highs and 63 new lows.

(Additional reporting by Tanya Agrawal; Editing by Dan Grebler)