Stocks hold gains as Fed sees ’somewhat slower’ slide in economy; S&P 500 hits 3-month high

Stocks hold gains as Fed sees recession easing

NEW YORK — Stocks are holding on to big gains as the Federal Reserve says it sees the recession easing.

The central bank left interest rates at a record low level Wednesday after a two-day meeting.

The Fed says the economy will remain weak but that the “pace of contraction appears to be somewhat slower.”

Stocks have been higher as investors look to bright spots in a report on weaker-than-expected economic output for the first three months of the year.

The Dow Jones industrial average is up 175 at the 8,193 level. It had been up 182 ahead of the announcement.

The Standard & Poor’s 500 index is up 20 at 875, a three-month high. The Nasdaq composite index is up 41 at 1,715.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

NEW YORK (AP) — Investors aren’t letting a bad report on the economy get to them.

Stocks surged Wednesday, lifting the Dow Jones industrials about 190 points even after the government reported that gross domestic product contracted at an annual rate of 6.1 percent during the first three months of the year.

That was a much steeper drop than the 5 percent forecast by economists polled by Thomson Reuters, and the reading indicated that the recession has yet to loosen its grip. But investors drove the Standard & Poor’s 500 index to its highest trading level since late January as they focused on a handful of positives in the report.

Those bright spots included a rebound in consumer spending — which accounts for more than two-thirds of U.S. economic activity — and a decline in business inventories. On President Barack Obama’s 100th day in office, the GDP report at least provided signs that the nation is seeing its economic slide start to moderate.

Michael Sheldon, chief market strategist at Westport, Conn.-based RDM Financial, said the drop in business stockpiles “should set the stage for a pickup in production, employment and profits.”

Although the Dow remains 22 percent above its early March lows, stocks have been unsteady over the past several days on fears of a potential swine flu pandemic and persistent concerns about the country’s biggest banks.

Investors are nervous that some banks, notably Citigroup Inc. and Bank of America Corp., might have to get more capital from the government or other investors. Going in to Wednesday’s session, the Dow had lost 59 points this week.

Later Wednesday, the Federal Reserve concludes its meeting on interest rates. Investors are curious not only about policy makers’ assessment of the economy, but also about whether the central bank will accelerate its buying of Treasurys. After lowering its target rate to a range of zero to 0.25 percent, the Fed started buying government debt in March to try to lower rates in the market even further.

In early afternoon trading, the Dow jumped 190.68, or 2.4 percent, to 8,207.63.

The Standard & Poor’s 500 index gained 21.50, or 2.5 percent, to 876.66, and the Nasdaq composite index advanced 44.38, or 2.7 percent, to 1,718.19.

Wednesday’s GDP report follows recent data that suggests consumers have adopted a more upbeat outlook on the economy — which translates into increased spending and bigger corporate profits. On Tuesday, a report showing a sharp jump in consumer confidence in April helped pull stocks from an early decline and left the market with just modest losses.

Better-than-expected earnings have been boosting the market as well. On Wednesday, media conglomerate Time Warner Inc. said its first-quarter profit fell 14 percent on deteriorating ad sales, but results were better than Wall Street expected. And defense contractor General Dynamics Corp.’s first-quarter earnings rose 3 percent on sales of warships and other other military equipment.

Investors are still keenly focused on the financial sector, though.

Bank of America held a contentious annual meeting Wednesday. The Charlotte, N.C.-based bank — one of the biggest recipients of government support — is facing pressure from shareholders for its acquisition of Merrill Lynch, with some investor groups calling for the ouster of Chairman and CEO Ken Lewis.

Meanwhile, Citigroup, which has also received massive amounts of federal aid, is said to be seeking permission from the Treasury Department to pay special bonuses to employees. According to a report in The Wall Street Journal late Tuesday, some key employees are threatening to leave the company because of pay restrictions placed on the bank by the government.

In overseas trading, Japan’s Nikkei stock average fell 2.7 percent. Britain’s FTSE 100 rose 2.3 percent, Germany’s DAX index rose 2.1 percent and France’s CAC-40 rose 2.2 percent.

In other U.S. trading, the Russell 2000 index of smaller companies rose 19.86, or 4.2 percent, to 492.70.

About 10 stocks rose for every one that fell on the New York Stock Exchange, where volume came to 653 million shares.

U.S. government bond prices were mixed. The yield on the 10-year Treasury note rose to 3.02 percent from 3.01 percent on Tuesday.

The dollar was lower against other major currencies. Gold prices rose.

Light, sweet crude rose 96 cents to $50.88 a barrel on the New York Mercantile Exchange.