As was widely expected, the Federal Reserve Tuesday boosted a key short-term interest rate by a quarter-point, as the central bank continued its campaign to keep inflation under control.
Tuesday, the Dow Jones industrial average gained 130.01, or 1.3 percent, to 9,944.67. The Nasdaq composite index was up 34.06, or 1.9 percent, at 1,808.70.
The Nasdaq composite index was up 34 points, or 1.9, at the 1,808 level. And the S&P 500 added nearly 14 points, or 1.2 percent, closing at 1,079.
Wednesday, the Nikkei Stock Average of 225 issues closed at 11,049.46 points, up 95.91 points, or 0.88 percent, more than double the increase of the previous day's trading.
The dollar was quoted at 111.19 yen at 0600 GMT Wednesday, up 0.56 yen from late Tuesday in Tokyo but below the 111.34 yen it bought in New York later that day.
Tokyo stocks rose as players welcomed the U.S. Federal Reserve Bank's optimistic view of the American economy, significant for Japan because many of that nation's top companies export to the United States.
The Federal Reserve said the economy has slowed, including job creation, but added that it "appears poised to resume a stronger pace of expansion going forward." The Fed said soaring energy prices contributed to the weakness, but that their effect would be transitory.
Fed Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee, the panel that sets interest rates, boosted the target for the federal funds rate to 1.50 percent.
Commercial banks followed the Fed's rate hike with their own announcements that they were increasing their prime lending rate by a similar quarter-point, pushing the benchmark for millions of consumer and business loans from 4.25 percent to 4.5 percent.
The Fed, in a statement announcing its rate decision, referred to a "softness" in the economy - a comment some analysts interpret as signaling the central bank might forgo an increase in rates at its next meeting on Sept. 21.
That action would also allow the central bank to maintain a low profile as the presidential election heads into the home stretch, something the central bank would prefer to do.
"I think the Fed is going to be very measured and cautious going forward," said economist David Jones, the author of several books on the Greenspan Fed.
However, other analysts said they believed the Fed could still raise rates further in September if the economy has resumed a stronger pace of growth by that time. Stocks weakened on Wall Street just after the Fed's mid-afternoon announcement but reclaimed the lost ground and rose higher by day's end.
The federal funds rate, the interest that banks charge each other for overnight loans, had been at a 46-year low of 1 percent just six weeks ago when the Fed raised it to 1.25 percent, the first increase in four years.
The interest rate hike this week had been expected as analysts predicted the central bank would continue with its campaign to raise rates even in the face of last Friday's report that showed job creation slowed to a near-standstill last month.
Analysts said that if the Fed had decided to forgo its widely expected rate hike it would have raised concerns in financial markets that the central bank was worried that the current economic slowdown, which Greenspan has termed a "soft patch," was threatening to become more severe.
In explaining its action, the Fed noted that economic growth had moderated somewhat in recent months and "the pace of improvement in labor market conditions has slowed."
It blamed this economic slowdown on the jump in energy prices this year but predicted that the economic weakness should be temporary.
The Fed statement said that the economy "appears poised to resume a stronger pace of expansion going forward."
The Fed also repeated a pledge it made on June 30 when it first raised rates. It said that it believes future rate increases can be made "at a pace that is likely to be measured."
Private economists have interpreted that phrase to mean small quarter-point increases in rates at the Fed's regular meetings.
The Fed's next meeting will occur on Sept. 21. While another rate increase could come at that time, analysts said it will depend on the data between now and then.
If the next employment report shows continued weakness, then the Fed is expected to take a breather in its rate increases.
However, if the slowdown that began in June proves to be temporary, as Greenspan has predicted, then private economists said the central bank could well continue with further rate increases in September and at the Fed's last two meetings of the year in November and December.
The key will be the performance of the job market, analysts said. In July, the increase of just 32,000 payroll jobs was the weakest showing this year and far below the 200,000-plus that private analysts had been predicting.
On Tuesday, the Labor Department reported that productivity in the April-June quarter rose at an annual rate of 2.9 percent, the slowest increase since the final quarter of 2002.