Richard Drew, Associated Press
NEW YORK — Investors are pinning their hopes for the economy on the Federal Reserve.
Stocks rose in afternoon trading Tuesday as traders bet that a bleak forecast for U.S. economic growth would persuade the Fed to take steps to stimulate the U.S. economy. The market also got a lift from strong earnings at cruise operator Carnival Corp. The company's results raised hopes that upcoming third-quarter reports might not be as disappointing as some financial analysts have forecast.
The Dow Jones industrial average rose 121 points, or 1.1 percent, to 11,522 by 1:55 p.m. in New York. That wiped out its 108-point loss from Monday. The Standard & Poor's 500 index rose 12, or 1 percent, to 1,217. The Nasdaq composite rose 17, or 0.7 percent, to 2,630.
The Fed began a two-day meeting to discuss monetary policy. Many analysts believe it will announce a new stimulus plan for the economy when the meeting ends Wednesday. Investors are hoping the Fed will take a major step like starting a third program of Treasury bond purchases.
"You could make the case that the rally is based on the expectation there will be some stimulus," said David Smith, chief investment officer at Rockland Trust Investment Management Group, a firm based in Rockland, Mass., that manages about $1.7 billion in assets.
"If there isn't a material change from the current policy, it would be a disappointment," Smith said
Although investors have become increasingly pessimistic about the U.S. economy, they weren't fazed by news that the International Monetary Fund has lowered its forecast for the country's growth this year. Some saw it as another reason for the Fed to act. The IMF said it expects the U.S. economy to grow only 1.5 percent this year and 1.8 percent in 2012. In June, it had forecast 2.5 percent growth in 2011 and 2.7 percent in 2012.
The IMF also lowered its outlook for the 17 countries that use the euro because it fears Greece will default on its debt.
Investors were watching for any developments from negotiations on a bailout for Greece. In a Tuesday teleconference between Greek officials and other international lenders, Greek Finance Minister Evangelos Venizelos is trying to convince the European Commission, International Monetary Fund and European Central Bank, known collectively as the Troika, that Greece can make deep budget cuts. Greece must meet the Troika's strict budget targets in order to qualify for a second installment of the rescue package it received in 2010.
Greece is only one of several European countries that investors fear may be at risk of failing to pay their debts. On Monday night, the ratings agency Standard & Poor's cut Italy's credit rating by one notch, citing the country's growing debt and weak growth outlook. Italy has the second-biggest debt burden among countries that use the euro, after Greece.
If Greece or Italy were to default, European banks that have lent money to the countries could lose billions of dollars. That could hurt the European banking system and have repercussions for U.S. banks, which have lent billions to their European counterparts. Investors are concerned that a default in Europe could cause a lending crisis similar to what happened after the collapse of Lehman Brothers in 2008.
Investors have shifted between optimism and pessimism that the region's debt problems will be resolved. Stock prices have swung sharply for months in response to investors' changing mood. Moves of more than 100 points in the Dow have become commonplace.
Right now, hopes are not high that Greece will avoid a default, said Rockland Trust's Smith. "I'm sitting here, like a lot of investors, thinking we don't have anything like a concrete solution," he said.
But Carnival's earnings report was reassuring because the company's 3 percent rise in third-quarter earnings was due in part to higher ticket prices. There were concerns that consumers would cut back on travel because they're worried about the economy, but the company's profit beat forecasts. Its stock rose 5.7 percent.
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