Stocks soar to biggest gain in 2 years after Fed downplays higher rate increase

Stocks soared to their biggest gain in two years Wednesday after Federal Reserve Chairman Jerome Powell downplayed the likelihood of an even larger rate increase than the one just announced Wednesday.

That allayed investor concerns that the central bank was on its way to a massive increase of three-quarters of a percentage point at its next meeting in June. Powell's comments came after the Fed announced a half-point increase in its benchmark rate as part of its effort to fight inflation.

The Dow Jones Industrial Average jumped 932 points, or 2.8%, to close at 34,061. The S&P 500 gained almost 3%, while the tech-heavy Nasdaq jumped 3.2%. The S&P saw its best daily performance since May 2020, according to FactSet. 

The Federal Reserve is boosting interest rates to battle the highest inflation rate in 40 years, with the goal of tamping demand for goods and services by making it more expensive to borrow money. Investors had been concerned that the Fed could hike rates beyond the 0.5% increase announced today — which marks the biggest increase since 2000 — and signaled their relief through the market rally. 

"Even as the Fed Chief was seen as fulfilling market expectations for rate hikes this year and galvanizing the broader economy for the effect of rate hikes, financial markets appeared to react to the fact that the Fed was not considering 0.75% hikes," noted AXA IM's head of macroeconomic research David Page in a research note. 

Powell indicated that the central bank is considering additional 0.5% rate increases at its next two meetings, but added that the Fed is "not actively considering" 0.75% rate hikes, Page added. 

Big gainers: Tech, oil, banks

Investors are worrying about whether the Fed can pull off the delicate dance to slow the economy enough to halt high inflation, but not so much as to cause a downturn. Still, the market cheered the Fed's latest moves. Wall Street also took note of Powell's forecast that inflation may soon be tempered, said Quincy Krosby, chief equity strategist, LPL Financial. 

"The market is applauding Chairman Powell's comments that the economy remains strong thanks to solid corporate balance sheets and still cash-rich consumers," Krosby said in a research note. "Moreover, he suggested that perhaps the worst of the sharp move in inflationary pressures may be poised to ease."

Roughly 85% of the stocks in the S&P 500 notched gains, with technology companies powering much of the advance. Apple rose 4.1%. Other industries that enjoyed gains on Wednesday including banks and credit card companies, which are likely to boost lending rates in response to the Fed's rate hike. 

Energy stocks were among the biggest gainers following a 5.3% increase in the price of U.S. crude oil after Europe took a step closer to placing an embargo on Russian oil as that country continues its war against Ukraine. Any embargo could strain oil supplies and push prices still higher. Exxon Mobil rose 4%.

With reporting by the Associated Press.

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