U.S. stocks rose on Friday as investors took the Federal Reserve's discount rate increase as evidence the financial system is healing but worried the eventual withdrawal of easy money will hurt Wall Street.

Even as stocks closed out their best week of the year, investors were not convinced by the Fed's reassurance that its benchmark rate will remain near zero for an extended period of time.

Investors know the Fed is marching toward a hike. The question is, 'Is it a long or a short march? said Quincy Crosby, market strategist at Prudential Financial in Newark, New Jersey.

The KBW bank index <.BKX> rose 1.3 percent as 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.

Morgan Stanley recommended investors buy a number of bank stocks, including Bank of New York Mellon , up 3.5 percent to $28.66, and Northern Trust Corp , which rose 4.1 percent to $54.60.

The Dow Jones industrial average <.DJI> gained 9.45 points, or 0.09 percent, to 10,402.35. The Standard & Poor's 500 Index <.SPX> rose 2.42 points, or 0.22 percent, to 1,109.17. The Nasdaq Composite Index <.IXIC> edged up 2.16 points, or 0.10 percent, to 2,243.87.

The Dow ended the week 3 percent higher and the S&P 500 3.1 percent higher, the best performance for the two gauges since late November. The Nasdaq rose 2.8 percent, its best weekly showing since late December.

The latest U.S. inflation data, which showed consumer prices rose less than expected in January, seemed to support the view the Fed was not facing urgent pressure to raise its benchmark fed funds rate, which stands near zero and has helped fuel a broad advance in stocks.

FedEx Corp shares rose 2.1 percent to $81.76 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 4.6 percent to $53.29, boosted the S&P materials sector <.GSPM>.

Among declining shares, Dell Inc stock 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 2.9 percent to $63.90 after a Wall Street Journal report said the company is in advanced talks to buy rival Smith International Inc . Smith shares jumped 13 percent to $37.70.

Nearly 7.35 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 7 to 5, while on the Nasdaq, about nine stocks rose for every eight that fell.

(Editing by Kenneth Barry)