NEW YORK ( TheStreet) -- Investors felt a bit of relief and lifted stocks off their session lows Tuesday after the Federal Open Market Committee offered a tempered response to the downgraded growth picture, saying it would keep securities holdings at their current level by reinvesting in longer-term Treasuries.

Stocks had lost ground for much of the day after weak reads on Chinese import demand and U.S. productivity did little to build confidence in the recovery.

The Dow Jones Industrial Average, which had been down well over 100 points earlier in the session, finished off by 56 points, or 0.5%, to 10,644. The S&P 500 shed 7 points, or 0.6%, to 1121, and the Nasdaq finished 29 points lower, or 1.2%, at 2278.

On Tuesday, the Fed's monetary-policy-setting arm said the economic recovery was slowing, highlighting a weak labor market, tight credit and little income growth. The FOMC continued holding its target interest rate at near zero, while also saying it would "keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities" and rolling over Treasury holdings as they mature.

"I thought this was a really good middle of the road solution. It effectively is not pandering to either extreme," said Marc Pado, U.S. market strategist at Cantor Fitzgerald, saying the statement didn't include a new, broader quantitative easing program, but still did more than stay pat. "I think they wanted to walk that line -- not increasing the balance sheet, but not reducing the balance sheet... so, I think it was well played. The goal here was to do some modest quantitative easing."

Domestic stocks got off to a rough start, and the major indexes in Europe and Asia fell overnight, in response to news that China's trade surplus rose to an 18-month high of $28.7 billion in July, signaling a sharp downturn in import demand.

Also impacting Asian markets, the Bank of Japan voted to keep the uncollateralized overnight call rate at around 0.1% and left its view of the economy unchanged.

Overseas, Hong Kong's Hang Seng declined 1.5%, and Japan's Nikkei slipped 0.2%. The FTSE in London was losing 1%, and the DAX in Frankfurt was down by 1.4%.

The Economy

The Labor Department said non-farm productivity slipped 0.9% in the second quarter, disappointing expectations for an uptick of 0.1%. That compares with previous growth of 3.9%. Unit labor costs, meanwhile, inched 0.2% higher in the second quarter after dropping 3.7% previously. Economists had been anticipating stronger growth of 1.4%, according to Briefing.com.

The Department of Commerce said wholesale inventories rose 0.1% in June, compared with May's 0.5% growth and the 0.4% uptick that economists had been expecting, according to Briefing.com.
Ben Bernanke
Federal Reserve Board Chairman Ben Bernanke

Late Tuesday, the American Petroleum Institute said oil inventories shed 2.19 million barrels in the week ended Aug. 6. A survey of analysts from Platts projected stockpiles to fall by 2.4 million barrels. The government's Energy Information Administration will offer its own assessment on Wednesday morning.

Company News

After the bell, Walt Disney ( DIS) said it earned 67 cents a share during the third quarter on $10 billion in revenue, easily topping estimates on both fronts.

The Dow's biggest laggards included Intel ( INTC), Alcoa ( AA), Microsoft ( MSFT) and Travelers ( TRV).

Meanwhile, Merck ( MRK), Procter & Gamble ( PG), Pfizer ( PFE) and American Express ( AXP) topped the list of blue-chips ending in positive territory.

Hewlett-Packard shares lost 0.9% to $42.22 as speculation swirled regarding who will permanently replace Mark Hurd as CEO.

Research In Motion ( RIMM) was granted a reprieve as Saudi Arabia's telecom regulator will allow BlackBerry service to continue, citing progress in agreements regarding regulatory requirements. The stock added 1.1%, to $55.93.

In earnings news, Delta Petroleum ( DPTR) narrowed its net loss in the second quarter to 54 cents a share, which included a $96.1 million impairment charge. Revenue, meanwhile, jumped 73% to $36 million in the three-month period, largely because of an increase in contract drilling and trucking fees and higher oil and gas sales. Shares slipped 5.7% to close at 79 cents a share.

Shares of InterContinental Hotels ( IHG) fell 4.5%, to $17.25 despite the company returning to profitability and increasing its dividend by 5%, to 12.8 cents a share.

Fossil ( FOSL) and JA Solar ( JASO) also topped expectations, according to Briefing.com. Fossil shares rose 7.9%, to $45.84, while JA Solar saw shares slipped 8.8%, to $5.99.

Commodities and the Dollar

Crude oil for September delivery settled at $80.25 a barrel, down $1.23.

Elsewhere in commodity markets, the December gold contract finished $4.60 lower to settle at $1,198 an ounce.

The dollar was trading higher against a basket of currencies, with the dollar index up by 0.2%.

Treasuries

In the afternoon, a three-year note auction worth some $34 billion resulted in a bid-to-cover ratio at 3.31 and a record low yield at 0.844%, according to MarketWatch.

The benchmark 10-year Treasury was moving up by 18/32, pushing the yield down to 2.765%.

The two-year note was up by 1/32, diluting the yield to 0.521%. The 30-year bond was higher by 7/32, weakening the yield to 4.008%.

--Written by Melinda Peer and Sung Moss in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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