NEW YORK — U.S. stocks rose Tuesday, extending a two-day advance in the Standard & Poor’s 500 index, as smaller companies rallied before the Federal Reserve’s monetary policy decision tomorrow.

E*Trade Financial and Charles Schwab rallied more than 5.4 percent amid a Senate hearing on broker incentives. Medtronic advanced 2.6 percent as brokers including Morgan Stanley and Credit Suisse Group raised their ratings on the company. Netflix and Expedia jumped more than 3.1 percent as analysts recommended buying the shares. Edwards Lifesciences rose 4.6 percent after receiving approval for a heart device.

The S&P 500 gained 0.2 percent to 1,941.99. The Dow Jones industrial average added 27.48 points, or 0.2 percent, to 16,808.49. The Russell 2000 index of smaller companies rose 0.8 percent. About 5.7 billion shares changed hands Tuesday on U.S. exchanges, 7.5 percent below the three-month average.

“Overall, you’re still in a market environment where the path of least resistance is up,” John Canally, an economic strategist at LPL Financial, said in a phone interview from Boston. His firm oversees about $447.1 billion. “Another bump tomorrow could be the (Federal Open Market Committee), although the outcome is largely already priced in.”

U.S. stocks rose 0.1 percent Monday as corporate deals and growth in American manufacturing overshadowed escalating tension in Iraq. The S&P 500 had dropped 0.7 percent last week as Sunni insurgents in Iraq occupied more territory and oil prices jumped to an eight-month high.

The Russell 2000 closed Tuesday at its highest level in more than two months. It has rallied 7.4 percent from a May low, rebounding after a selloff in small-cap and Internet stocks. The gauge is 2.7 percent away from its all-time high reached in March.

Equities fell earlier Tuesday as data showed the U.S. cost of living rose more than forecast, reflecting broad-based gains that signal inflation will move closer to the Fed’s goal. The consumer price index increased 0.4 percent, the biggest advance since February 2013, after climbing 0.3 percent the prior month.

“Probably the most troubling number for investors is the CPI number,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott, which oversees $65 billion in assets, said by phone. “Both numbers put those inflation readings around the Fed’s target policy of 2 percent. That to me suggests that the Fed, in looking at that, could say we run the risk of inflation being hot and could suggest pulling forward an increase of rates.”

A pickup in inflation lessens the threat of a prolonged drop in prices that hurts economic growth, giving Fed officials reason to continue to scale back their unprecedented bond-buying program.

A Commerce Department report showed builders broke ground on 1 million U.S. homes in May, a 6.5 percent decline. The median forecast of 78 economists surveyed by Bloomberg projected May housing starts would come in at a 1.03 million pace. Permits decreased 6.4 percent to a 991,000 annualized rate.

The Fed began its two-day policy meeting Tuesday in Washington. The Federal Open Market Committee will reduce the pace of monthly asset purchases by $10 billion to $35 billion, economists project. Some 62 percent of 58 economists in a Bloomberg survey predict the Fed will halt bond buying at its October meeting.

Officials led by Chair Janet Yellen will release a new set of quarterly forecasts for unemployment, inflation, economic growth and the benchmark federal funds rate at the conclusion of their meeting Wednesday. In March, officials predicted their target rate, now close to zero, would be 1 percent at the end of 2015 and 2.25 percent a year later.