The stock market ripped higher Wednesday afternoon after the Federal Reserve delivered on its plan to fight inflation. The central bank hiked interest rates by a half-percentage point and started reducing the size of its balance sheet, which has ballooned during the pandemic.
“The risk markets took a collective sigh of relief today as the Fed was not as hawkish as some had feared,” said Jack McIntyre, portfolio manager at Brandywine Global.
It was the Dow’s largest gain since Nov. 9, 2020, and the S&P 500’s largest gain since May 18, 2020.
The Fed announced that it is lifting the target fed-funds rate by half of a percentage point to a range between 0.75% and 1%. The central bank also said it “anticipates that ongoing increases in the target range will be appropriate” and that “the invasion [Russia and Ukraine] and related events are creating additional upward pressure on inflation.”
Fed Chair Jerome Powell also said the Fed isn’t considering a 75-basis-point interest rate hike, a move markets had feared.
The Fed will also begin reducing its bondholdings. Expectations that the central bank would shrink its massive balance sheet have already brought the price of the 10-year Treasury note lower and the yield higher.
But markets were already anticipating the Fed’s move.
The Fed had already made clear that it is adamant about reducing the recently high inflation rate, a move that is expected to reduce economic growth. Consequently, the S&P 500 had dropped 13% so far in 2022 to its closing low of the year, hit Friday. That comes alongside soaring interest rates, with the 2-year Treasury yield up to as much as 2.85% today, a significant increase from 0.73% at the end of 2021. The 10-year yield had risen from 1.51% at the end of 2021 to as high as 3% Tuesday.
Those rates dropped after the Fed signaled it wasn’t about to become even more aggressive in tightening monetary policy. The 2-year yield fell to 2.64% Wednesday afternoon, and the 10-year yield dropped to 2.92%.
Before the meeting, the bond market expected the Fed funds rate to average 3% over the next couple of years. The market is no longer expecting that, Ford Donohue, principal at Hormich Berg, said.
That’s the main reason why stocks gained Wednesday.
The S&P 500’s year-to-date drop implied markets had already priced in the Fed’s moves, as well as geopolitical risks and an economic slowdown, wrote Scott Chronert, at Citigroup .
Geopolitical risks are certainly part of the picture for oil. The price of WTI crude oil gained more than %5 to over $108 a barrel, as the EU proposed an import ban on Russian oil and refined oil products. That sent the Energy Select Sector SPDR Fund (XLE) to a new multiyear high, up 4.1% Wednesday.
Elsewhere, the ADP jobs report revealed that the U.S. economy added 247,000 private sector jobs in April, below the forecast for an increase of 390,000 jobs. Markets now await the Bureau of Labor Statistics’ count of job gains, out Friday. Economists are looking for an increase of 400,000 nonfarm payrolls.
Here are seven stocks on the move Wednesday:
Marriott International (MAR) stock gained 4.7% after the company reported a profit of $1.25 a share, beating estimates of 90 cents a share, on sales of $4.2 billion, above expectations for $4.17 billion.
DiDi Global (DIDI) was down, before ending flat. Other U.S.-listed Chinese tech stocks also initially fell, before gaining, as Alibaba (BABA) and JD.com (JD) gained 1% and 1.6%, respectively. Regulatory pressures have been a brutal headwinds for Chinese tech stocks over the past year, and DiDi has said it faces a Securities and Exchange Commission investigation into its U.S. initial public offering in June 2021.