Wall Street Rallies on Fed Move

The stock market snapped a three-day losing streak Tuesday as the government reported an easing of labor-cost pressures and the Federal Reserve stuck with its steady-as-they-go campaign to tighten credit.

A pullback in long-term bond yields helped real-estate-related shares rebound after their recent sharp slide.

Stocks pushed ahead early in the day after the Labor Department said unit labor costs -- a key measure of inflation pressures -- slowed to an annualized rate of increase of 1.3% in the second quarter from a 3.6% rate in the first quarter.

That offset disappointment over other data that showed a slowdown in worker productivity gains in the latest quarter compared with the first quarter.

The Dow Jones industrial average jumped about 70 points in early trading and held that increase awaiting the Fed’s interest rate announcement at about 11:15 a.m. PDT. The Dow rose further after the announcement, pulled back somewhat, then rallied near the close, ending up 78.74 points, or 0.8%, at 10,615.67.

That recouped nearly half the blue-chip index’s loss over the previous three sessions.

Among broader indexes, the Standard & Poor’s 500 rose 8.25 points, or 0.7%, to 1,231.38. The Nasdaq composite gained 9.80 points, or 0.5%, to 2,174.19.

Winners outnumbered losers by modest margins on the New York Stock Exchange and on Nasdaq.

The Fed, as expected, raised its key short-term interest rate from 3.25% to 3.5%, the 10th increase since mid-2004. Policymakers cited the economy’s strength and indicated that they would keep tightening credit.

Some investors say the stock market can live with rising short-term rates because of the economy’s underlying health.

“We’ve got growth at a nice level without a pickup in inflation,” said Nathaniel Paull, who helps manage $5.3 billion at New Amsterdam Partners in New York. The Fed “can keep going for a while as long as the economy keeps chugging along. The market can pick up some ground in the second half.”

Major stock indexes have mostly been rallying since late April, but they stalled last week on worries about record oil prices and higher long-term interest rates.

On Tuesday, near-term crude futures in New York slid 87 cents to $63.07 a barrel after hitting an all-time high Monday. Supply concerns were eased as refineries in Texas and Illinois resumed fuel production after shutdowns.

In the bond market, the 10-year Treasury note yield slipped to 4.39% from a four-month high of 4.43% on Monday.

Mark MacQueen, co-founder of money management firm Sage Advisory in Austin, Texas, said some investors stepped up to buy bonds on relief that the Fed, in its statement, indicated that it could stay on the same steady course of quarter-point rate increases at each meeting.

Ten-year Treasury notes are attractive as their yield approaches 4.5%, and “we’re increasingly enamored with” two-year and five-year T-notes as well, said Bill Gross, investment chief at Pacific Investment Management Co. in Newport Beach.

Among Tuesday’s market highlights:

* Home builders and real estate investment trusts were mostly higher after tumbling over the last week. Toll Bros. gained $1.12 to $49.88, Centex added $1.17 to $69.96, Post Properties rose 75 cents to $37.35, and AvanlonBay Communities jumped $1.47 to $80.05.

* DaimlerChrysler rose $1.76 to a four-year high of $51.60 on a report that its former star executive Wolfgang Bernhard, now at Volkswagen, would return to Daimler. Neither company would comment.

* Investors have mostly applauded second-quarter earnings news, but that wasn’t the case with reports from three companies: Fluor slid $4 to $59.80, Blockbuster lost 92 cents to $7.09 and apparel maker Volcom dropped $2.75 to $31.25.

* Chinese Internet search engine Baidu.com tumbled $19.40 to $96.10. It had soared 354% in its market debut Friday.

Also in the new-issue market, steakhouse chain Ruth’s Chris jumped $2.70 to $20.70 on its first trading day, and insurance firm James River was up $2 to $20 in its debut.

* Early today in Tokyo, the Nikkei index rose above 12,000 for the first time in more than a year after the government upgraded its outlook for the economy.