US stocks finished January with a gain, as investors welcomed signs of labor cost reductions and inflation cooling as they prepare for the Federal Reserve's decision on Wednesday.

With trading volumes low on Tuesday, stock gains could have been fueled by short covering. The S&P 500 had its best month since October, as traders expect the Fed to slow its rate hikes. According to data compiled by analysts, the Nasdaq 100 rose the most this month since July and had its best start to the year since 2001.

Treasury bonds rose, with the 10-year yield falling to around 3.49%. In January, it fell more than 30 basis points, the most since November. The dollar index fell.

This week's economic data, earnings, and rate decisions have investors scrambling. On Tuesday, data showed that prices in the US housing market continued to fall, while another report showed that consumer confidence dropped unexpectedly. The Fed's decision on Wednesday hangs over everything, with the central bank widely expected to raise rates by a quarter percentage point.

While the Labor Department's data on Tuesday added to evidence that wage growth is slowing, it may not be enough to sway the Fed. Instead, investors will be watching the tone officials set for future meetings. While Fed Powell has repeatedly resisted calls for rate cuts later this year, central bank officials may consider pausing rate hikes following their March meeting.