Blue-chip stocks rallied for a second straight session today, surprising Wall Street with their strength a day before the Federal Reserve's interest rate announcement.

The Dow Jones industrial average rose 160.20, to close at 10,815.35, extending Monday's 102.59-point gain. Volume was relatively light, which magnified price swings and suggested that the rally, while broad-based, lacked conviction.

Other market indicators also rose, although their gains were smaller than the Dow's. The Standard & Poor's 500-stock index rose 20.10, to 1351.45, and the Nasdaq composite gained 39.67, to 2642.11. The Nasdaq, dominated by technology stocks, is now just 10 points away from its April 26 record high.

"There was no overwhelming moonshot," said Larry Wachtel, market analyst for Prudential Securities. "But some buyers are back, ready to be adventurous."

Traders continued to tread lightly while they waited to see whether the Fed's Open Market Committee, which was meeting today and Wednesday, would raise interest rates by an expected 0.25 percentage points, or whether the policymakers would take a more aggressive approach to contain economic growth and inflation.

"The main concern will be whether the FOMC retains a tightening bias," said Scott J. Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. That would indicate that the Fed is inclined to implement further rate increases if it determines that higher rates would stave off inflation.

Stocks got a boost today from the bond market, where the yield on the Treasury's benchmark 30-year bond fell to 6.06 percent from late Monday's 6.09 percent. The bond's price rose $3.75 per $1,000 invested. Volume was thin, however, as traders there also awaited the Fed's decision.

On Wall Street, traders were responding to news on individual stocks. After Morgan Stanley Dean Witter raised its rating on Pepsi, the soft drink maker's stock rose 1-3/16, to 38.

Philip Morris fell 7/8, to 40 1/8, after telling analysts Monday that its earnings would be lower than expected.

Drug stocks, which have tumbled in recent months, surged as President Clinton announced details of his Medicare prescription benefit plan. While the drug companies initially worried that it would set the stage for price controls, analysts said the plan has little chance of passing. Pfizer rose 3-13/16, to 104 7/8, and Eli Lilly rose 2-11/16, to 68.

Chevron was the biggest contributor to the Dow's gains, rising 4-3/16, to 93-11/16, after Donaldson Lufkin & Jenrette raised its rating on the stock.

Advancing issues outnumbered declining ones by 9 to 5 on the New York Stock Exchange. Volume on the NYSE totaled 820.1 million shares, up from 652.9 million Monday.

The NYSE composite index rose 9.10, to 637.99; the American Stock Exchange composite index rose 3.38, to 777.48; and the Russell 2000 index rose 5.47, to 453.08.