Wall Street's focus will be the central bank when it issues its decision on rates and its accompanying economic statement at 2:15 p.m. EDT. The slumping housing sector, tightening credit market and stock market volatility have given investors reason to believe monetary policy is in need of some loosening.

Most in the market expect either a quarter percentage point cut in the benchmark federal funds rate or a half-point cut, given last month's decline in jobs and weakening retail sales. Equally important is how the Fed characterizes the housing, credit and stock markets' drag on the U.S. economy, and if it suggests there are more rate reductions to come.

As investors awaited the central bank's decision, they were pleased to see economic and corporate data come in better than expected. Lehman Brothers Holdings Inc., the nation's fourth-largest investment bank, posted a smaller-than-anticipated 3 percent decline in its third-quarter profits compared with a year ago. Lehman is the first of the major U.S. brokerages to report earnings from the most recent, tumultuous quarter. Other banks are due to report later in the week.

The Labor Department's August producer price index was also more favorable than the market predicted. Wholesale prices fell 1.4 percent last month, the biggest decline in 10 months and led by a 6.6 percent drop in energy costs. Core inflation, which eliminates often volatile food and energy prices, rose by a mild 0.2 percent, as expected.

"All of the cards have fallen nicely into alignment this morning," said Phil Orlando, chief equity market strategist at Federated Investors, pointing to Lehman's earnings, the benign PPI, and a calming third-quarter earnings outlook from Bank of America late Monday. But everything could turn when investors react to the Fed decision.

"They've dug in their heels for 50 basis points or bust on the funds rate, and my personal view is they're probably going to be disappointed," Orlando said. "The potential for a sloppy market reaction is certainly on the table."

In midday trading, the Dow Jones industrial average rose 82.10, or 0.61 percent, to 13,485.52.

The broader stock indexes also advanced. Standard & Poor's 500 index rose 10.54, or 0.71 percent, to 1,487.19, while the Nasdaq composite index gained 14.17, or 0.55 percent, to 2,595.83.

Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.49 percent from 4.47 percent late Monday. Bond prices move opposite their yields.

Lehman rose $1.72, or 2.9 percent, to $60.34 after releasing higher-than-expected earnings.

In other positive earnings news, Best Buy Co. Inc., the country's largest consumer electronics retailer, said its second-quarter profit rose 8.7 percent, more than analysts expected, thanks to strong revenues overseas and tighter controls on spending.

Best Buy rose $1.87, or 4.2 percent, to $46.41.

On Monday, stocks fell moderately on very thin trading volumes. Tuesday will likely be another low volume session until the Fed's decision is released.

In August, commodity prices fell alongside stocks as investors pulled their money out of riskier assets and placed it in safer securities like Treasurys. But they have since bounced back. Crude oil prices briefly surpassed $81 a barrel Tuesday on the New York Mercantile Exchange to a new record.

Light, sweet crude recently rose 83 cents to $81.40 per barrel.

Though the effect of high oil prices on the U.S. consumer is a concern -- especially given that the dollar is near record lows versus the euro -- the Fed tends to measure inflation with food and energy prices stripped out.

The dollar was mixed against other major currencies.

Later, at 1 p.m. EDT, the National Association of Home Builders releases its housing market outlook, and the market is anticipating the index for September to weaken compared to August.

The Russell 2000 index of smaller companies rose 5.44, or 0.70 percent, to 781.25.

Advancing issues outnumbered decliners by nearly 3 to 1 on the New York Stock Exchange, where volume came to 407.4 million shares.

In European trading, Britain's FTSE 100 rose 1.63 percent, Germany's DAX index rose 1.27 percent and France's CAC-40 rose 2.02 percent.

In Asia, Japan's Nikkei index fell 2.02 percent and Hong Kong's Hang Seng Index fell 0.09 percent.

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