Adobe Stock
NEW YORK (AP) — Stocks soared to their biggest gain in two years Wednesday and bond yields dropped after Federal Reserve Chair Jerome Powell downplayed the likelihood of an even larger rate increase than the one just announced Wednesday. That allayed concerns that the central bank was on its way to a massive increase of three-quarters of a percentage point at its next meeting in June. The comments came after the Fed announced a half-point increase in its benchmark rate as part of its effort to fight inflation. The S&P 500 jumped 3%. The yield on the 2-year Treasury fell sharply, to 2.64%.
The remarks, which came after the Fed announced its decision to raise its key interest rate by double the usual amount, allayed concerns that the central bank was on its way to a massive increase of three-quarters of a percentage point at its next meeting in June.
The S&P 500 climbed 2.9% as of 3:39 p.m. Eastern, on pace for its best day since May 2020. The Dow Jones Industrial Average was up 899 points, or 2.7%, to 34,028, and the Nasdaq climbed 3% after earlier having been in the red.
Bond yields fell after the Fed’s announcement. The yield on the 2-year Treasury dropped to 2.65% from 2.78% late Tuesday, an unsually large move. The yield on the 10-year Treasury, which influences mortgage rates, fell to 2.92% from 2.96% It had initially jumped to 3.01% until Powell’s remarks during a press conference.
The comments came shortly after the Fed said it raised its benchmark short-term interest rate by a half-percentage point, it’s most aggressive move since 2000, and signaled further large rate hikes ahead. The increase raised the Fed’s key rate to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago.
The Fed also announced details of how it will start reducing its huge holdings of Treasury debt and mortgage-backed securities, a tool the central bank has used to help keep long-term interest rates low.
The latest move by the Fed had been widely expected, with markets steadying this week ahead of the policy update, but Wall Street was concerned the Fed might elect to raise rates by three-quarters of a percentage point in the months ahead.
Powell eased those concerns, saying the central bank is “not actively considering” such an increase.
The VIX, an index that measures how worried investors are about upcoming drops for the S&P 500, fell about 11%, one of its biggest drops this year, after Powell's remarks.
Earlier, Powell also said the economy can make it through rate increases without falling into a recession.
“The economy is strong and well positioned to handle tighter monetary policy,” he said, though he cautioned “it’s not going to be easy.”
Investors are worrying about whether the Fed can pull off the delicate dance to slow the economy enough to halt high inflation but not so much as to cause a downturn. Still, the market cheered the Fed's latest moves.
“It’s certainly heady days when the market doesn’t blink at the most aggressive rate hike in 22 years, but keep in mind this was extremely well-telegraphed and priced in,” said Mike Loewengart, managing director, investment strategy at E-TRADE from Morgan Stanley.
The central bank also announced that it will start reducing its huge $9 trillion balance sheet, which consists mainly of Treasury and mortgage bonds, starting June 1.
Energy stocks were among the biggest gainers Wednesday following a 5.3% increase in the price of U.S. crude oil after Europe took a step closer to placing an embargo on Russian oil as that country continues its war against Ukraine. Any embargo could strain oil supplies and push prices still higher. Exxon Mobil rose 3.7%.
The Fed’s aggressive shift to raise interest rates comes as rising inflation puts more pressure on businesses and consumers. Higher costs for energy and other commodities have prompted many businesses to raise prices and issue cautious forecasts to their investors. Wall Street and economists are worried that higher prices on everything from food to gas and clothing will prompt a slowdown in consumer spending and crimp economic growth.
The worries have worsened with Russia’s invasion of Ukraine and its impact on energy and key food commodity prices. China’s increasingly stricter lockdown measures because of rising COVID-19 cases have also added concerns about slower economic growth because of supply problems and shipping backlogs.
Wall Street is closely watching economic data for any signs that inflation might be easing. Consumer prices surged in March, but a measure of inflation that excludes food and energy had its smallest monthly rise since September. That was a welcome sign for investors and more of the same in the coming months cold temper inflation concerns.
“If we can get just a few more readings showing inflation slowing, that could be the match that sparks some confidence,” said Ryan Detrick, chief market strategist for LPL Financial.
Tupperware slumped 33.8% after the direct seller of plastic storage containers and cosmetics withdrew its financial forecast for the year following a highly disappointing first quarter. The company cited pressure from inflation, lockdowns in China and the conflict in Ukraine.
Lyft plunged 29.8% after the ride-hailing company gave investors a disappointing revenue forecast for its current quarter.
Airbnb jumped 7.1% after the short-stay home rentals company sharply narrowed its first-quarter loss and gave investors an encouraging revenue forecast. Starbucks vaulted 10.9% after reporting surprisingly strong sales at stores that have been open at least a year, which is a key measure of health for retailers.
AP Business Writer Stan Choe contributed. Veiga reported from Los Angeles.