Stocks and yields end higher after Fed interest rate hike

TOKYO – Stocks reversed in the afternoon and closed broadly higher on Wednesday after the Federal Reserve announced its first interest rate hike since 2018.

As Wall Street had widely anticipated, the central bank announced that it was increasing its short-term policy rate by 0.25 percentage point. The Fed, which has kept its rate near zero since the pandemic recession hit two years ago, has also signaled potentially up to seven rate hikes this year.

The move marks a shift in policy by the Fed away from keeping interest rates ultra-low as it seeks to rein in inflation, which is at its highest level since the early 1980s. Rate hikes eventually lead to higher loan rates for many consumers and businesses.

Stocks lost most of their early gains and bond yields rose sharply shortly after the Fed’s latest policy statement was released at 2 p.m. ET. The indices faltered as Fed Chairman Jerome Powell made remarks at a press conference before surging in the final hour of trading.

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The S&P 500 rose 2.2%, the Dow Jones Industrial Average gained 1.5% and the Nasdaq composite climbed 3.8%, its biggest gain since November 2020.

Bond yields rose sharply after the Fed announcement. The 10-year Treasury yield rose to 2.20%, then hovered at 2.17% by late afternoon. It was at 2.15% on Tuesday evening. The 2-year Treasury yield rose to 2% then fell back to 1.94%, still a big move from 1.85% a day earlier.

“The market got what it expected,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “Interest rates need to be higher. Inflation has to be kept under control, and the risk to everything is much greater with high inflation than with high interest rates.

The Fed is trying to slow the economy enough to stem the high inflation that is sweeping the country, but not enough to trigger a recession. It’s part of a wider move by central banks around the world to end the support they provided to the global economy after the pandemic hit.

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Inflation has hit its highest level in generations as the global economy recovers. Economists worry that this could eventually reduce spending and hurt growth. The Commerce Department’s latest retail sales report shows Americans slowed February spending on gadgets, home furnishings and other discretionary items as higher prices for food, gasoline and housing consume more of their wallet.

In remarks after the release of the central bank statement, Powell noted that before the Russian invasion of Ukraine, he expected inflation to stabilize in the first three months of this year. . He now believes that inflation will decline in the second half.

“We are now seeing short-term upward inflation in oil prices, other commodity prices,” he said. Chains.”

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The S&P 500 rose 95.41 points to 4,357.86. The Dow added 518.76 points to 34,063.10. The Nasdaq gained 487.93 points to 13,436.55.

Smaller company stocks also posted solid gains. The Russell 2000 Index rose 61.75 points, or 3.1%, to 2,030.72.

A list of concerns, including inflation, has made markets volatile in recent weeks. Stocks have been swinging wildly on a daily, sometimes hourly basis. This volatility will likely persist until investors have a better idea of ​​where the economy is headed.

“It’s not uncommon for hiking cycles to spook stocks,” said Gargi Chaudhuri, head of iShares Investment Strategy Americas. “But as the way forward becomes clearer, most sectors of the S&P 500 index post positive returns in the year following the first rise.”

Even so, the combination of higher rates and inflation poses a risk to the economy, noted Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

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“The stock market is vulnerable to the twin threats of too high inflation, which will dampen corporate profits and consumer demand, and too high interest rates, which could trigger a recession,” he said. declared.

Oil prices have mostly risen since late February amid fears that the conflict in Ukraine will squeeze energy markets. Benchmark US crude fell 1.5%, a relatively muted move considering the gigantic swings it has been making recently. Prices are up nearly 30% for the year, and the recent surge has pushed U.S. gasoline prices to record highs. This heightened concerns about worsening inflation.

Tech stocks, banks, retailers and other companies that depend on consumer spending accounted for much of the S&P 500’s gains as investors shifted money to sectors seen as riskier. Microsoft rose 2.9%, JPMorgan Chase gained 4.5% and Amazon.com gained 3.9%. Energy companies and traditionally safe stocks such as utilities lagged the broader market.