The Dow Jones Industrial Average erased earlier losses and jumped higher Wednesday after the Federal Reserve said it sees no interest rate hikes through 2023 and that it will let inflation run hotter than usual to ensure a full economic recovery.
The blue-chip benchmark gained 150 points. The S&P 500 traded flat. The Nasdaq Composite cut losses to trade 0.3% lower. The tech-heavy benchmark fell 1.5% earlier in the session as growth stocks got hit by surging bond yields again.
While the Fed expects benchmark interest rates to remain near zero for the next two years, the central bank upgraded their economic outlook to reflect expectations for a stronger recovery from the pandemic-triggered recession. Gross domestic product is expected to grow 6.5% in 2021 before cooling off in later years.
Expectations for core inflation also moved higher, with the committee now looking for a 2.2% gain this year as measured by personal consumption expenditures. The central bank’s stated goal is to keep inflation at 2% over the long run.
“It sounds like the perfect scenario for investors and the outlook and you’re seeing market response to this very optimistic view,” said Michael Arone, chief investment strategist at State Street Global Advisors. “Monetary policy is going to remain largely accommodative almost regardless of what happens with interest rates, inflation and asset prices.”
Investors will also hear from Fed Chair Powell, who is likely to move the stock and bond markets with his commentary, despite being unlikely to offer specifics.
The 10-year Treasury yield remained higher following the Fed’s statement, rising 4 basis points to 1.67%. Earlier in the session, the benchmark rate jumped to 1.689%, hitting a level unseen since late January 2020. The 30-year rate climbed to 2.428%, its highest level since November 2019. Higher rates erode the value of future cash flows, hurting growth-oriented companies particularly hard.
“There’s this assumption [Powell’s] going to be dovish… With another round of spending, it’s hard for him not to be dovish. They are definitely afraid of scaring the market. They’re afraid of disrupting the recovery,” said Peter Boockvar, chief investment officer of Bleakley Advisory Group.
Rising interest rates have been an overhang for stocks in recent weeks, specifically the tech sector. The jump in yields has forced a shift into value stocks from growth, pushing the Dow Jones Industrial Average and S&P 500 to hover near record highs.
Shares of Disney erased earlier losses and gained 0.8% after CEO Bob Chapek told CNBC that California’s two Disneyland theme parks will reopen on April 30.
McDonald’s climbed 2% after Deutsche Bank upgraded the stock to buy from hold.
—CNBC’s Patti Domm contributed to this report.
