Technology companies led a broad rally for stocks on Wall Street on Wednesday as investors welcomed another rate of interest increase by the Federal Reserve as a sign the central bank is ratcheting up its campaign to fight surging inflation.
In a widely expected move, the financial institution raised its key interest rate by three-quarters of a point, lifting the speed to the highest since 2018.
At a press conference, Chair Jerome H. Powell suggested the Fed’s rate hikes have already had some success in slowing the economy and possibly easing inflationary pressures.
Trading
Some on Wall Street saw that as a sign that the Fed might not have to raise rates as aggressively in the coming months, triggering a rally within the final hour of regular trading.
The Standard & Poor’s 500 indexes climbed 2.6%; therefore, the tech-heavy Nasdaq composite surged 4.1%, its biggest gain in more than two years. The Dow Jones industrial average rose 1.4%. Smaller-company stocks also gained, lifting the Russell 2000 by 2.4%.
Bond yields turned broadly lower after the Fed’s announcement. The two-year Treasury yield, which tends to maneuver with expectations for the Fed, fell to 2.98% from 3.06% late Tuesday. The 10-year yield, which influences mortgage rates, fell to 2.77% from 2.79%.
This year, rate increases like Wednesday’s, the fourth thus far, make borrowing costlier and slow the economy. The hope is that the Fed and other central banks can deftly find the center ground where the economy slows enough to whip inflation but not enough to cause a recession.
“The Fed raised rates by the expected 75 basis points but recognized that the economy is softening while the work market remains strong,” said Jay Hatfield, chief executive of Infrastructure Capital Advisors. “The statement is slightly dovish and bolsters the tech-led stock rally that started this morning.”
Also read – Key factors affecting Innovative Industrial’s Q2 earnings
Analysis
Some Wall Street analysts were less optimistic that the Fed may go for more moderate rate increases, especially because inflation has accelerated to 9.1%, the fastest annual pace in 41 years.
Charlie Ripley, the senior investment strategist at Allianz Investment Management, called the rise “warranted.”
“That being said, recent economic data is now introducing a better degree of uncertainty around the path of policy as we move forward from here,” Ripley said.
In a note Wednesday, analysts at Citi said that although Powell mentioned that a slowdown in rate increases would be appropriate at some point, exactly when which may be remains undetermined. They said they “would not view this as a very dovish comment.”
“We still expect core inflation to push the Fed to hike more aggressively than they or markets anticipate,” the analysts wrote, noting they expect the Fed will announce another three-quarter-point increase at its September policy meeting, with further rate boosts continuing into early 2023.
The S&P 500 rose 102.56 points to 4,023.61. The Dow gained 436.05 points to shut at 32,197.59. The Nasdaq rose 469.85 points to 12,032.42.
The Russell 2000 picked up 43.09 points to finish at 1,848.34. The indexes are now on pace for a weekly gain, extending Wall Street’s strong July rally. The S&P 500 is up 6.3% thus far this month.
Also read – Key factors affecting Innovative Industrial’s Q2 earnings
It’s not uncommon for stocks to rally when the Fed issues a replacement interest rate policy statement, only to sink the subsequent day.
Stocks are choppy this week after solid gains last week that was mainly fueled by better-than-expected reports on corporate profits.
Inflation remains at the forefront of investors’ minds, however. Markets were spooked Monday after retail giant Walmart warned that its earnings are being hurt by inflation for food and gas, forcing shoppers to chop back on more profitable discretionary items such as clothing.
The retailer’s profit warning within the middle of the quarter was rare and raised worries about how the highest inflation in 40 years affects the entire retail sector.
Meanwhile, some parts of the economy, particularly the construction industry, are already slowing because the Fed has raised rates.
Sales of previously occupied U.S. homes slowed in June for the fifth month as mortgage rates have climbed sharply this year. Expectations of upper overall rates have pushed up the 10-year Treasury yield, influencing home loan rates.
Investors kept an eye fixed on Wednesday’s latest corporate earnings reports, including strong earnings from Microsoft and Google parent Alphabet.
Microsoft and Alphabet rose 6.7% and 7.7%, respectively, after their latest quarterly reports. Boeing rose 0.1% after the aerospace company reported it delivered more planes within the first quarter than it has since the start of the pandemic.
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Technology and communication services stocks accounted for an enormous share of the S&P 500’s gains. Nvidia rose 7.6%, and Netflix added 6%.
Retailers, restaurant chains, and other companies that depend on direct consumer spending also helped lift the market. Chipotle Mexican Grill jumped 14.7% after the chain reported second-quarter earnings that beat analysts’ forecasts.
Spotify Technology vaulted 12.2% after the music streaming service reported monthly active user and premium subscriber numbers that exceeded expectations.
