Stocks jumped on Wednesday in a relief rally from their 2022 doldrums after the Federal Reserve raised rates by a widely anticipated half percentage point and Chairman Jerome Powell ruled out getting even more aggressive in the central bank’s inflation-fighting campaign.
The Dow Jones Industrial Average rose 900 points, or 2.7%. The S&P 500 gained 2.8%. The tech heavy Nasdaq Composite rose 2.8%.
The central bank announced that it was hiking its benchmark interest rate 50-basis-points, or 0.5 percentage points. That is the biggest hike since 2000 for the Fed, but the move was widely expected by investors.
Stocks moved sharply higher when Fed Chair Jerome Powell said the central bank was not considering a 75-basis-point hike in future meetings.
“So a 75 basis point increase is not something that committee is actively considering,” Powell said. “I think expectations are that we’ll start to see inflation, you know, flattening out.”
The rate hike and rally follow a brutal April for stocks, which dragged the tech heavy Nasdaq Composite into bear market territory. The S&P 500 entered Wednesday more than 13% below its record high. Both of those indexes hit their lowest levels of the year earlier this week.
Powell said he believed the Fed could slow economic growth without causing a jump in unemployment, citing the high number of job vacancies and strong household balance sheets.
“I would say we have a good chance to have a soft, or soft-ish, landing,” Powell said.
Investors also appeared to be betting on the Fed’s confidence in the U.S. economy. Stocks seen as economic bellwethers also performed well, with Home Depot and Caterpillar rising about 3%. Bank stocks also gained ground, with Citigroup and JPMorgan Chase rising more than 2%.
The impact of the Fed’s tightening on economic growth has been a key concern for markets in recent months. The majority of respondents to the May CNBC Fed Survey indicated they expect a recession at the end of the tightening cycle.
“High inflation constrains the Fed, making easing monetary policy less likely if growth (or markets) fall. We have long argued that elevated inflation would put the Fed in a bind – when growth weakens they would not be willing to or able to ride to the rescue by loosening monetary policy,” Citi quantitative strategist Alexander Saunders said in a note to clients.
Powell repeatedly said inflation was “much too high” during his press conference and commented that additional 50-basis-point hikes would be on the table at upcoming meetings.
Ahead of the Fed meeting, some Wall Street strategists suggested that markets could be in for a relief rally despite the rate hike. After the first increase in March, the S&P 500 jumped more than 6% in the following weeks before pulling back again in April.
The benchmark 10-year Treasury yield topped 3% again on Wednesday morning, trading near its highest level since 2018, but fell back following Powell’s comments.
The gains were broad across the board for stocks. Large tech stocks moved higher following the Fed announcements, with Apple and Google-parent Alphabet gaining more than 2% each. Energy giants Exxon and Chevron rose more than 3%.
Corporate earnings reports were leading to notable moves on Wednesday. Lyft plummeted 29% after the ridesharing company shared on Tuesday evening weak guidance for the current quarter as it expects to invest in driver supply. Rival Uber dropped 8%.
Elsewhere, chipmaker Advanced Micro Devices also moved higher following its report, gaining about 6%, after beating estimates and delivering strong guidance. Casino stock Caesars Entertainment was under pressure after the company missed estimates on the top and bottom lines.
Airbnb rose 3.6% as the company expects a continued travel rebound, and Starbucks added 2.4% after topping revenue estimates. CVS Health rose 2.5% after beating estimates on the top and bottom lines.
Stocks have risen for two straight days to start May, stabilizing ahead of the Fed meeting.
The moves came as the markets attempt to recover from a brutal tech-led April sell-off that saw the Nasdaq hit its worst month since 2008. The Dow and S&P 500 also finished their worst month since March 2020.
