"We are looking for 25 basis points on both the discount and Fed fund rates, based on some sense of stability in stocks, as well as credit conditions," said Tom DiGaloma, head of Treasury trading at Jefferies & Co. Inc.
The Dow Jones Industrial Average was up 65.9 points, or 0.6%, to 12,449.8, with 18 of its 30 components ahead, with telecommunications stocks among the blue chips posting strong gains.
AT&T Inc. was up 3.1%, and Verizon Communications rose 1.7%.
The S&P 500 gained 5.96 points, 0.4%, to 1,359.92, while the Nasdaq Composite slipped 0.98 points, or 0.03%, to 2,348.93.
On the New York Mercantile Exchange, gold futures edged lower, with the contract for February delivery off $1.1 at $926.00 an ounce after surging earlier to another record high of $933.30 an ounce in electronic trading. .
Elsewhere on the Nymex, crude futures rose above $91 a barrel, with the contract for March delivery recently up 16 cents at $91.15 a barrel. .
Volume on the New York Stock Exchange topped 467 million, and advancing stocks pulled ahead of declining issues nearly 3 to 2. On the Nasdaq, 653 million shares traded, and advancing stocks ran just ahead of those declining.
On Monday, stocks advanced after a bleak report on new-home sales spurred speculation that the Federal Reserve would trim its rate target by at least 25 basis points in the wake of last week's emergency 75 basis point cut.
The FOMC begins its deliberations Tuesday afternoon, with a decision expected Wednesday afternoon.
Already ahead, stock futures ran higher after the Commerce Department reported orders for durable goods rose 5.2% in December, far exceeding economists' expectations of a 2.2% gain. .
Other Tuesday data included the Conference Board's consumer confidence index, which fell in January, giving up much of the previous month's gains. .
And, another index, this one released by Standard & Poor's, found the decline in U.S. home values accelerating in November. .
Stocks active early on included EMC Corp. , which posted a 35% gain in fourth-quarter net income but also said revenue for its VMware Inc. subsidiary fell short of expectations. EMC stocks were off 7.8%. .
Countrywide Financial Corp. , in a deal to be acquired by Bank of America Corp. , reported fourth-quarter losses of $422 million. Its stock was up 3.7%.
American Express Co. shares were up 0.3% after it reported a 10% decline in fourth-quarter net income after Monday's close, with the credit-card company setting aside more money to cover loan losses. .
Overseas, most Asian markets bounced back in the wake of Monday's gains on Wall Street. .
In Europe, shares traded on a pace to score their third rise in the past six sessions. .
By Kate Gibson