Technology companies led a broad rally for stocks on Wall Street on Wednesday as investors welcomed another interest rate hike by the Federal Reserve as the central bank wrapped up its campaign to fight rising inflation.
In a widely expected move, the central bank raised its key interest rate by three-quarters of a basis point to its highest level since 2018.
At a news conference, Chairman Jerome Powell noted that the Fed’s rate hikes have already had some success in slowing the economy and possibly easing inflation. Some on Wall Street saw it as a sign the Fed may not need to raise rates in the coming months, prompting a rally in the final hours of regular trading.
The S&P 500 rose 2.6% and the tech-heavy Nasdaq rose 4.1%, its biggest gain in more than two years. The Dow Jones Industrial Average rose 1.4 percent. Smaller company stocks also gained, sending the Russell 2000 up 2.4%.
Bond yields fell sharply following the Fed’s announcement. The two-year Treasury yield, which tends to move in line with the Fed’s expectations, fell to 2.98% from 3.06% late Tuesday. The 10-year yield, which affects mortgage rates, fell to 2.77% from 2.79%.
Like Wednesday’s increase, the fourth this year, it makes borrowing more expensive and slows the economy. The hope is that the Fed and other central banks can carefully find a middle ground where the economy slows enough to hit inflation but not enough to cause a recession.
Jay Hatfield, chief executive of Infrastructure Capital Advisors, said: “The Fed hiked by an expected 75 basis points, but found that the economy is weakening while the labor market remains strong. “The statement is a bit dodgy and is reinforcing the tech-led rally in stocks that started this morning.”
Some Wall Street analysts were less optimistic that the Fed would opt for more modest hikes, especially as inflation rose to 9.1%, the fastest annual rate in 41 years.
Charlie Ripley, senior investment strategist at Allianz Investment Management, called the hike “confirmed.”
“That being said, the latest economic data is now introducing significant uncertainty over the policy path going forward,” Ripley said.
In a note Wednesday, Citi analysts said that while Powell indicated that a walk decline would be appropriate at some point, that may never be determined, “they don’t view this as an isolated comment.”
“We continue to expect core inflation to push the Fed to hike more sharply than either they or the markets anticipate,” the analysts wrote. In early 2023.
The S&P 500 rose 102.56 points to 4,023.61. The Dow gained 436.05 points to close at 32,197.59. The Nasdaq rose 469.85 points to 12,032.42, and the Russell 2000 gained 43.09 points to end at 1,848.34. The indicators are now all on pace for weekly gains, extending Wall Street’s strong July rally. The S&P 500 is up 6.3 percent so far this month.
It’s not uncommon for stocks to rally only to sell the next day when the Fed issues a new interest rate policy statement.
Stocks have been under pressure this week following strong gains last week on better-than-estimated reports on corporate profits.
Inflation, however, remains at the forefront of investors’ minds. Markets were mixed on Monday after retail giant Walmart warned that profits were being hurt by rising food and gas prices.
The retailer’s mid-quarter profit warning was rare and raised concerns about how inflation, the highest in 40 years, is affecting the entire retail sector.
Meanwhile, some parts of the economy are slowing because the Fed has raised rates, particularly the housing industry. Sales of pre-owned U.S. homes fell for the fifth month in a row in June as mortgage rates rose sharply this year. Expectations of higher overall rates have pushed up the 10-year Treasury yield, which affects mortgage rates.
Investors watched the latest corporate earnings reports on Wednesday, including strong earnings from Google owner Alphabet and Microsoft.
In their most recent quarterly report, Microsoft and Google’s parent Alphabet increased 6.7% and 7.7% respectively. Boeing shares rose 0.1 percent after the aerospace company reported that it delivered more planes in the first quarter since the outbreak began.
Technology and communications services stocks accounted for the bulk of the S&P 500’s gains. Nivea increased by 7.6% and Netflix by 6%.
Retailers, restaurant chains and other companies that rely on direct consumer spending also helped boost the market. Chipotle Mexican Grill jumped 14.7 percent after the restaurant chain reported second-quarter earnings that beat analysts’ forecasts.
Spotify Technology surged 12.2% after the music streaming service reported monthly active user and core subscriber numbers that beat Street expectations.