By Joy Wiltermuth and Frances Yue
U.S. stocks end sharply higher, after the Federal Reserve delivered the first 50-basis-point interest rate hike since 2000, but said larger 75-basis-point increases weren’t in play.
The Fed also outlined plans to reduce its near $9 trillion balance sheet.
How did stocks trade?
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.05% rose 932.27 points, or 2.8%, ending at 34,061.06, and booking its best daily percentage gain since Nov. 9, 2020, according to Dow Jones Market Data.
The S&P 500 /zigman2/quotes/210599714/realtime SPX +1.06% jumped 124.69 points, or 3%, ending at 4,300.17, its best daily percentage climbs since May 18, 2020.
The Nasdaq Composite rose 401.106 points, or 3.2%, finishing at 12,964.68, its best day since March 16.
On Tuesday , the Dow industrials /zigman2/quotes/210598065/realtime DJIA +1.05% rose 67.29 points, or 0.2%, to close at 33,128.79, the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.06% gained 0.5% to finish at 4,175.48. The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.90% added 0.2% to end at 12,563.76.
What drove markets?
Stocks finished sharply higher Federal Reserve Chairman Jerome Powell said a 75-basis-point increase wasn’t being actively considered by policy makers, after the Fed pulled the trigger on a half percentage point interest rate hike, as expected , and announced the start of “quantitative tightening,” or reducing its near $9 trillion balance sheet. Powell said half-point rises remain on the table for the next couple of meetings.
The 50-basis point move was the biggest from the U.S. central bank since 2000 when President Bill Clinton occupied the White House, and comes as the central bank works to cool hot inflation without setting off an economic recession.
Powell talked about a strong economy, but also the pain consumers have been feeling at the grocery store and gas pump, in afternoon news conference, saying higher interest rates are the cure.
Clarity from the Fed on size and scope of future rate increases could give beleaguered stocks a lift, say some analysts.
“Honestly, I think this hiking cycle is going to be quite a bit shorter than the market is pricing in right now,” said Bill Callahan, investment strategist at Schroders, by phone, after the Fed decision. “I think the Fed sees the slowing economic data, and I think they are raising rates now as quickly as possible so they have some ammunition to cut on the other side of this.”
The central bank also outlined a process to slash its balance sheet, first by $47.5 billion a month starting in June, but ramping up to $95 billion a month.
Russell Price, chief economist at Ameriprise Financial, said the question is what factors will be in play in terms of how long Fed officials continue with 50 basis point hikes.
“In the early 1990s, we were able to go through a rate-hiking cycle and avoid an economic downturn,” he said, by phone. “Quite frankly, it’s the only time we’ve achieved a soft landing in the last five interest rate hiking cycles.”
Bryce Doty, senior portfolio manager at Sit Fixed Income, warned “there is more pain to come as yields continue to move higher,” even with “the carnage incurred by bond investors so far this year.”