Stocks edged higher in choppy trading on Friday as investors took the Federal Reserve's surprise increase in its discount rate as further evidence the financial system is strengthening.

The latest U.S. inflation data seemed to support the view the Fed was not facing urgent pressure to raise its benchmark fed funds rate. The Labor Department said its Consumer Price Index rose less than expected in January.

In raising the discount rate, which the Fed charges banks for emergency loans, the U.S. central bank late on Thursday insisted the move was not an indication of a broader tightening of the easy monetary policy that has fueled a broad advance in stocks.

Morgan Stanley recommended investors buy a number of banks, including Northern Trust Corp , whose shares rose 4 percent.

By the time the markets opened today investors had begun to assimilate the implications of the Fed move, said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

The market had accepted the Fed's rationale... and the (U.S. central bank) would remain on hold until further notice.

The Dow Jones industrial average <.DJI> gained 10.66 points, or 0.10 percent, to 10,403.56. The Standard & Poor's 500 Index <.SPX> added 2.51 points, or 0.23 percent, to 1,109.26. The Nasdaq Composite Index <.IXIC> rose 2.78 points, or 0.12 percent, to 2,244.49.

The S&P and the Dow industrials were on track to close their best week in more than three months.

Nevertheless, the Fed's announcement delivered a jolt to financial markets on Thursday, and U.S. stocks fell initially on Friday.

The Fed said its increase in the discount rate reflected improved financial market conditions that warrant less of a helping hand from the U.S. central bank.

In their recommendation for bank stocks, Morgan Stanley analysts favored Bank of New York Mellon , up 3.8 percent to $28.74, and Northern Trust, which rose to $54.77. The KBW bank index <.BKX> rose 1.2 percent.

FedEx Corp shares rose 2.3 percent to $81.92 and led gains in the industrial sector of the S&P 500 <.GSPI> and on the Dow Jones transportation average <.DJT>.

U.S. Steel Corp , up 4.4 percent to $53.20, boosted the S&P materials sector <.GSPM>.

Among declining shares, Dell Inc shares fell 6.7 percent to $13.47 a day after the company reported quarterly gross margin that missed Wall Street's expectations.

Oilfield services company Schlumberger Ltd shares fell 3.5 percent to $63.53 after a Wall Street Journal report said the company is in advanced talks to buy rival Smith International Inc . Smith shares jumped 13.6 percent to $37.88.

(Editing by Kenneth Barry)