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 US$85 billion a month in bond purchases as early as Wednesday at the end of its policy meeting.
Most economists predict the Fed's initial "tapering" move to be small, expecting a reduction of between $10 billion and $15 billion in the monthly purchases of Treasurys and mortgage bonds.
The program, dubbed quantitative easing, had been put in place to hold down long-term interest rates to stimulate the economy, which in turn has buoyed stock markets.
U.S. indexes were positive, as the Dow Jones industrials jumped 34.95 points to 15,529.73, while the Nasdaq was ahead 27.85 points to 3,745.70.
Both markets were boosted by a 0.39 per cent rise in shares of Microsoft Corp. (Nasdaq:MSFT) 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 closed 13 cents higher at US$32.93. The stock had traded as low as US$26.26 last December.
The broader market measure, the S&P 500, added 7.16 points to 1,704.76 — just a few points shy of its record high.
North American markets had closed higher on Monday after economist Larry Summers, the frontrunner to head the central bank, bowed out.
Summers had long been perceived as an opponent to the Fed's aggressive bond-buying program. 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 on to the next hurdle and what the Fed will indicate in terms of the tapering."
A number of economic releases came out Tuesday, but most economists agreed that 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. The consumer price index increased just 0.1 per cent in August, after a 0.2 per cent increase in July.
"Given the trend month to month, especially in the U.S., has been positive, there is enough conviction there that tapering should start," said Pashootan.
Meanwhile, Statistics Canada said 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 was mostly positive at the close, as the gold sector registered the highest gain of 1.22 per cent, while December bullion fell $8.40 to US$1,309.40 an ounce.
Shares in Barrick Gold Corp. (TSX:ABX) saw an uptick of 1.07 per cent, or 20 cents, to $18.87 after the company said it was working to strengthen its governance practices and looking to add new independent directors to its board.
The gold miner, which has been under pressure from shareholders to make changes, said it was also looking at making improvements to its executive compensation practices.
The info tech sector also some strength, picking up 0.95 per cent, as shares in BlackBerry Ltd. (TSX:BB) closed up nearly two per cent, or 21 cents, to $10.88.
The energy sector was the leading decliner, falling by 0.36 cent as the October crude contract dipped $1.17 to US$105.42 a barrel. The metals and mining sector was up 0.32 per cent, while December copper was unchanged at US$3.22 a pound.