Markets in Toronto and New York closed higher with investors showing few worries about the strong possibility that the U.S. Federal Reserve will soon announce it's ready to start reducing monetary stimulus.

The S&P/TSX composite index climbed 17.23 points to 12,834.11. The Canadian dollar was up 0.28 of a cent to 97.13 cents US.

Though hiring and economic growth in the United States remain soft, the Fed is widely expected to slow the pace of its $85-billion US a month in bond purchases as early as Wednesday at the end of its policy meeting.

Most economists expect the Fed's initial "tapering" move to be small — a reduction of between $10 billion to $15 billion of monthly purchases in Treasurys and mortgage bonds.

Attempt to boost borrowing

The program, dubbed quantitative easing, had been put in place to keep long-term loan rates low to get people to borrow and invest in the stock market.

U.S. indexes were positive, with the Dow Jones industrials index up 34.95 points to 15,529.73, while the Nasdaq was ahead 27.85 points to 3,745.70. 

Both were  boosted by a 0.55 per cent rise in shares of Microsoft Corp. after the tech company's board approved a 22 per cent increase to its quarterly dividend along with a new $40-billion stock buyback program. Shares of the Redmond, Wash.-based company rose 18 cents to $32.98 US by midday. The stock had traded as low as $26.26 last December.

North American markets had closed higher on Monday after economist Larry Summers, the frontrunner to head the central bank, bowed out.

Summers might have scaled back faster

Summers had long been perceived as an opponent to the Fed's aggressive bond-buying program, and his withdrawal to succeed current Fed chairman Ben Bernanke had investors predicting that Fed vice-chair Janet Yellen, a supporter of the stimulus program, may be next in line for the top job.

"We're seeing the second round of reduced optimism from Summers' withdrawal but that's finding itself in a tug of war with what's on deck with the Fed speaking in terms of tapering," said Kash Pashootan, vice-president and portfolio manager at First Avenue Advisory in Ottawa, a Raymond James company.

"We're now onto the next hurdle and what the Fed will indicate in terms of the tapering of what's to come."

A number of economic releases came out Tuesday, but most economists agreed that unless the results are earth-shattering, the Fed has already made up its mind about pulling back on its stimulus.

The U.S. Labor Department reported that consumer prices barely rose last month, the latest sign that slow economic growth is keeping inflation tame.

U.S. CPI numbers show very low inflation

The consumer price index increased just 0.1 per cent in August, after a 0.2 per cent increase in July. Excluding volatile food and energy costs, core prices also rose just 0.1 per cent.

Pashootan said the disappointing figures will do little to sway the Fed's mind on reducing stimulus.

"Given the trend month-to-month, especially in the U.S., has been positive, there is enough conviction there that tapering should start," he said.

"Again, that's the markets best guess of what will happen and that's why we're still seeing that cautious sort of stance because the Fed may look at it a little bit differently. I don't think the softer than expected numbers here and there are going to have an impact on what the Fed will do because the underlying pattern has been positive for a while now."

Meanwhile, Statistics Canada says manufacturing sales rose 1.7 per cent to $49.5 billion in July — far better than analysts had expected, with Ontario showing the biggest monthly gain since mid-2012. The federal agency says gains were recorded in 15 of 21 industries and six of Canada's provinces.

The Toronto Stock Exchange the info tech sector registered the highest gain of 0.71 per cent. Shares in BlackBerry Ltd. climbed two per cent or 24 cents to $10.56.

Oil prices declining

The energy sector gained 0.27 per cent as oil prices declined. The October crude contract dipped $1.17 to
$105.42 US a barrel. Crude prices have dropped as the threat of a U.S. invasion of Syria diminishes.

The gold sector was up 0.26 per cent, while December bullion fell $6.50 to US$1,311.30 an ounce. Shares in Barrick Gold Corp. were up 12 cents $18.87 after the company said it is working to strengthen its governance practices and is looking to add new independent directors to its board.

The gold miner, which has been under pressure from shareholders to make changes, said it is also looking at making improvements to its executive compensation practices.