Wall Street rallies on hopes the Federal Reserve’s rate hikes are done
U.S. stocks rallied Wednesday after the Federal Reserve indicated it may not need to pump the brakes any harder on Wall Street and the economy.
The Standard & Poor’s 500 index rose 1.1% in its first trading day coming off a third straight monthly loss. The Dow Jones industrial average gained 0.7%, and the Nasdaq composite jumped 1.6%.
Stocks built on gains as Treasury yields eased in the bond market after the Fed announced its decision to hold interest rates steady, as expected. The Fed has already yanked the overnight rate from nearly zero early last year to its highest level since 2001, above 5.25%.
Fed Chair Jerome H. Powell said in the afternoon that the central bank still isn’t sure its main interest rate is high enough to ensure high inflation will move down to its 2% target. That kept alive the possibility of more hikes by the Fed. He also said cuts to interest rates, which can act like steroids for financial markets, aren’t even on Fed officials’ minds at the moment.
But Powell acknowledged that a recent run higher in longer-term Treasury yields, and the tumble in stock prices that they helped cause, are working on their own to slow the economy and could be starving high inflation of its fuel. If they can do that persistently, he indicated they could help the Fed whip inflation without requiring more rate hikes.
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The jump in yields has already brought the average 30-year fixed mortgage rate to nearly 8%, for example, “and those higher costs are going to weigh on economic activity to the extent this tightening persists.”
And, he said, the Fed has time to assess the full effects of its previous rate increases after unleashing a furious barrage that began early last year.
“It takes time, we know that, and you can’t rush it,” Powell said. “Slowing down is giving us a better sense of how much more we need to do, if we need to do more.”
All together, Powell’s comments were “dovish enough” for financial markets, said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “Dovish” is what Wall Street calls an inclination to keep interest rates easier, and Ma continues to expect the Fed won’t hike rates any more.
Since the spring, longer-term Treasury yields have been rising rapidly and catching up with the Fed’s overnight rate. They’ve rallied as the U.S. economy has remained remarkably resilient and the central bank has warned it may keep its short-term rate high for a long time. Last month, the 10-year Treasury yield topped 5% to reach its highest level since 2007.
The nation’s economy expanded at a robust 4.9% annual rate as Americans defied higher prices, rising interest rates and recession forecasts and spent.
High yields knock down prices for stocks and other investments while making borrowing more expensive for nearly everyone. That slows the economy and puts pressure on the entire financial system.
The yield on the 10-year Treasury sank to 4.76% on Wednesday from 4.92% late Tuesday. Much of the drop came after the Fed gave a nod to the notion that higher bond yields and shakiness in financial markets may be slowing the economy on their own.
But yields were already easing in the morning following several mixed reports on the economy.
One report from ADP suggested hiring accelerated last month by employers outside the government, though not by as much as economists expected. A more comprehensive jobs report from the U.S. government will arrive Friday.
A separate report said U.S. employers were advertising slightly more job openings at the end of September than economists expected. The Fed has been hoping for softening there, which could take pressure off inflation without requiring many layoffs.
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A third report, meanwhile, said U.S. manufacturing contracted by more last month than economists had forecast. Manufacturing has been one of the U.S. economy’s hardest-hit areas.
In the background, big U.S. companies continue to report stronger profits for the summer than analysts expected, though that often hasn’t been enough to offset worries about higher yields.
DuPont fell 8.2% despite reporting stronger profit for the latest quarter than analysts had forecast. It gave some financial forecasts for 2023 that fell short of analysts’ expectations as it sees weakness in China and other challenges.
Estee Lauder also pointed to slower growth in China, among other factors, when it cut some of its financial forecasts for its fiscal year. Its stock tumbled 18.9%.
On the winning side of Wall Street, chipmaker Advanced Micro Devices rose 9.7% after it reported stronger profit and revenue for the latest quarter than forecast. Its revenue forecast for the end of 2023 disappointed some analysts, but it also pointed to growth in 2024 coming from the artificial intelligence boom.
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Big Tech stocks were also winners Wednesday, along with other high-growth stocks typically seen as the biggest beneficiaries of easier interest rates.
Gains of 2.4% for Microsoft, 1.9% for Apple and 3.8% for Nvidia were the three strongest forces pushing the S&P 500 higher.
All told, the S&P 500 rose 44.06 points to 4,237.86. The Dow gained 221.71 points to 33,274.58, and the Nasdaq added 210.23 points to 13,061.47.
Earlier in the day, stock indexes were mostly higher across Europe and Asia.
AP writers Matt Ott and Elaine Kurtenbach contributed to this report.
