The S&P/TSX composite index rose 187.23 points to end at 11,788.36. The TSX Venture Exchange was up 4.63 points at 1,264.38.
The Canadian dollar gained 0.56 of a cent to 98.21 cents US.
Traders expect the Fed will unveil a plan to stimulate the economy at the end of its two-day meeting, which began Tuesday. It's expected to extend Operation Twist, under which it sold $400 billion in short-term securities and replaced them with long-term securities in an effort to put more downward pressure on long-term rates.
Meanwhile, Wall Street also found some optimism in the latest housing data.
The U.S. Commerce Department said overall housing starts fell 4.8 per cent in May, to a seasonally adjusted annual rate of 708,000. However, the report showed that U.S. builders started work on more single-family homes, which suggested a slow recovery in the housing market.
The Dow Jones industrial average increased 95.51 points to 12,837.33. The Nasdaq composite index rose 34.43 points to 2,929.76 and the S&P 500 index was up 13.20 points at 1,357.98.
In commodities, the July crude contract on the New York Mercantile Exchange rose 76 cents to US$84.03 a barrel.
July copper was down half a cent at US$3.43 a pound, while August gold was down $5.40 at US$1,6221.60 an ounce.
TSX gold stocks were the sole decliner, dropping 0.7 per cent, while the metals and mining sector was up three per cent.
"Investors are realizing right now that the markets are cheap," said Craig Fehr, Canadian markets strategist at Edward Jones in St. Louis, Mo.
"There's been a tremendous discount placed on this market because of what's going on in Europe, while if you just look purely at the fundamentals ... it's by no measure a standout, but it's likely to continue to be a positive. If you can manage to look past Europe for a couple seconds, the markets look a lot brighter."
Statistics Canada reported that wholesale sales rose 1.5 per cent in April to $49.3 billion, mainly due to a 48.5 per cent increase in sales of agricultural supplies. Excluding that industry, overall sales were unchanged from March.
The U.S. Labor Department said employers in April posted the fewest job openings in five months, suggesting hiring will remain sluggish in the months ahead. Job openings fell to a seasonally adjusted 3.4 million in April, down from 3.7 million in March. The March figure was the highest in nearly four years.
In corporate developments, fuel cell company Ballard Power Systems (TSX:BLD) cut its 2012 sales guidance and said Monday it now expects an adjusted operating loss due to delays in signing a deal in Brazil. Revenue is expected to total about $85 million for the year, down from an earlier estimate of $100 million. Ballard shares were up two cents at $1.14.
Bombardier (TSX:BBD.B) has decreased its 20-year industry forecast for deliveries of small- and medium-size commercial aircraft due the global economic slowdown that has tempered the aerospace recovery. Shares were flat at $4.05.
Microsoft has unveiled Surface, a tablet computer to compete with Apple's iPad, part of what it says will be a new family of devices. It was one of the biggest gainers on the Dow, rising 86 cents, or 2.9 per cent, to US$30.70.
World stock markets were largely flat as relief from Greece's election results evaporated amid worries that the financial crisis in the 17 countries that use the euro is far from over.
A narrow victory by Greek conservatives, who favour upholding an austerity program that their country accepted in exchange for an international financial bailout, initially relaxed fears of a chaotic exit by Greece from the euro. But now the focus is back on Spain, which paid sharply higher interest rates in a short-term bill auction Tuesday, suggesting doubts about the country's ability to stand on its own.