NEW YORK—Wall Street rallied Wednesday following the Federal Reserve’s sharpest hike to interest rates since 1994, and its later assurance that such mega-hikes would not be common.
The S&P 500 climbed 54.51, or 1.5 percent, to 3,789.99 after whipping through roller-coaster trading immediately following the Fed’s latest move to fight inflation.
In equally topsy-turvy trading, Treasury yields eased in the bond market after Chair Jerome Powell seemed to soothe the market’s fears about an overly aggressive Fed by implying more modest rate increases may be coming later this year.
The Dow Jones Industrial Average swung between a gain of 647 points and a loss of nearly 180 before finishing with a gain of 303.70. It closed at 30,668.53, up 1 percent. The Nasdaq composite jumped 270.81, or 2.5 percent, to 11,099.15.
The market’s ebullience was a sharp turnaround from the worldwide rout that has dominated much of this year, which forced the S&P 500 into a bear market earlier this week. The fear has been that high inflation will push the Fed and other central banks to clamp the brakes too hard on the economy and create a recession. Wednesday’s gain was the first for the S&P 500 in six days.
Some analysts cautioned the rally could be short-lived given how deeply and broadly high inflation has seeped into the economy and how unsettlingly uncertain the future path is.
“Chair Powell painted as rosy a picture as could be painted, and to achieve that picture that he is laying out, that pathway, a lot has to go right,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “It’s a challenging path, and he acknowledged that.”
The Fed on Wednesday hiked its key short-term interest rate by three-quarters of a percentage point, triple the usual move. Powell said the Fed may consider another increase that big at its next meeting in July, but he also said such a hike is “an unusually large one” and not to expect it to be common.
The Fed is “not trying to induce a recession now, let’s be clear about that,” Powell said. He said Wednesday’s big increase was about the Fed speeding up the move to get interest rates back to normal, calling it “front-end loading.”
“He’s making it extremely clear to the market, to U.S. consumers, that the Fed takes this seriously and is doing whatever it takes to take inflation down and maintain price stability,” said Quincy Krosby, chief equity strategist for LPL Financial.
All kinds of investments, from bonds to bitcoin, have tumbled this year as high inflation forces central banks to swiftly remove supports propped underneath markets early in the pandemic.
Even if central banks pull off the delicate trick of slowing the economy just enough to stamp out inflation, without a recession, higher interest rates push down on prices for investments regardless. The hardest-hit have been the investments that soared the most in the easy-money era of ultralow interest rates, including high-growth technology stocks and cryptocurrencies.
Treasury yields this week shot to their highest levels in more than a decade on expectations for a more aggressive Fed, though they eased Wednesday following Powell’s comments. A disappointing report showing that sales at U.S. retailers unexpectedly slumped in May from April contributed.
The economy is still largely holding up amid a red-hot job market, but it has shown some signs of distress recently.
The two-year Treasury yield fell to 3.21 percent from 3.45 percent late Tuesday, with the biggest move happening after Powell said 0.75 percentage point rate hikes wouldn’t be common. The yield on the 10-year Treasury pulled back to 3.28 percent from 3.48 percent.
“The bond market right now is driving the broader market and that will continue,” said Jay Hatfield, CEO of Infrastructure Capital Advisors.
Cryptocurrency prices continued to sink, and bitcoin dropped as low as $20,087.90, nearly 71 percent below its record of $68,990.90 set late last year. It was down nearly 1 percent at $21,770 in afternoon trading, according to CoinDesk.
Powell said Wednesday the Fed is moving “expeditiously” to get rates closer to normal levels after last week’s stunning report that showed inflation at the consumer level unexpectedly accelerated last month. It dashed hopes on Wall Street that inflation may have already peaked.
More bad news came with a report on consumer sentiment showing households’ expectations for future inflation were rising, which could spark a vicious cycle that worsens it.
