NEW YORK (AP) — Investors are pinning their hopes for the economy on the Federal Reserve.
Stocks rallied in midday trading Tuesday as traders bet that a grim forecast for U.S. economic growth and persistent economic problems in Europe would compel the Fed to take measures to stimulate the U.S. economy.
Strong results from cruise operator Carnival Corp. also offered some hope that the next round of corporate earnings might not be as disappointing as some analysts expect.
The Dow Jones industrial average rose 110 points, or 1 percent, to 11,511 in midday trading. The Standard & Poor's 500 index rose 12, or 1 percent, to 1,216. The Nasdaq composite rose 23, or 0.9 percent, to 2,635.
The Dow Jones industrial average erased all of its Monday losses by noon Tuesday.
The Fed began a two-day meeting to discuss monetary policy Tuesday. Many analysts believe the central bank will announce new stimulus measures Wednesday. Investors want the Fed to take a major step like buying Treasury bonds to push down long-term interest rates.
"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
Carnival rose 5.7 percent after the company said slimmer costs and strong ticket prices boosted its net income past analyst expectations.
Global financial problems have caused financial markets to swing wildly for months. More sobering news about major economies threatened to destabilize stocks before the market opened Tuesday.
The International Monetary Fund turned more pessimistic on the U.S. economy. The IMF said it expects economic growth of only 1.5 percent this year and 1.8 percent in 2012. In June, it had forecast 2.5 percent in 2001 and 2.7 percent in 2012.
The forecast gave weight to some investors' fears that the U.S. could be on the brink of another recession.
Those fears have been compounded by a shaky global economy. The IMF also lowered its outlook for the 17 countries that use the euro because it fears Greece will default on its debt.
In a Tuesday teleconference between Greek officials and other international lenders, Greek Finance Minister Evangelos Venizelos will attempt to convince the European Commission, International Monetary Fund and European Central Bank, known collectively as the Troika, that it can make deep budget cuts. Greece must meet the Troika's strict budget targets in order to qualify for a fresh installment of the rescue package it received in 2010.
With no resolution for Europe's debt crisis in sight, stocks have been highly sensitive to Greece's efforts to qualify for emergency funds.
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 on its debt, it could become difficult for other European countries with heavy debt to borrow money. That could infect the European banking system and have severe repercussions for U.S. banks, which have lent billions of dollars to European companies. The U.S. and European economies are so closely linked that a European banking crisis could lead to a global credit crisis similar to the one that hit global stocks in 2008.
"I'm sitting here, like a lot of investors, thinking we don't have anything like a concrete solution" to prevent a Greek default, said Rockland Trust's Smith.
In corporate news, Ralph Lauren Corp. rose 2 percent to an all-time high after an analyst upgraded the stock because of its strong international business and sales of higher-priced merchandise.
Homebuilder PulteGroup Inc. rose 2.7 percent after an analyst said the company's stock was a bargain because of its healthy cash stores and 45 percent stock drop since late June.
Netflix fell 8 percent a day after customers balked at the streaming video and DVD rental company's decision to separate its two businesses.
ConAgra Foods Inc. fell 0.5 percent after the food maker said higher costs for consumer foods pushed its quarterly profit down 42 percent, below the expectations of Wall Street analysts.
Technology company Oracle Corp. reports its quarterly earnings after the closing bell. Investors are looking for signs of success in the company's server computer business.