Stocks turn higher after Fed hints at slower rate hikes

Traders work on the floor at the New York Stock Exchange in New York, Wednesday, Nov. 2, 2022. (AP Photo/Seth Wenig)

Stocks bounced higher and Treasury yields fell sharply in afternoon trading Wednesday after the Federal Reserve indicated it might slow down the pace of its interest rate increases.

As expected, the central bank also announced its fourth straight extra-large rate increase of three-quarters of a percentage point as it fights the worst inflation in decades.

The Fed’s hint that it could ease back on the rate-increase program was welcome news for markets, which have been worried the recent pace of rate hikes could slow the economy so much that it goes into a recession.

The S&P 500 was up 0.7% as of 2:30 p.m. Eastern. The Dow Jones Industrial Average rose 338 points, or 1%, at 33,004, and the Nasdaq composite rose 0.7%. The indexes had all been in the red much of the day ahead of the Fed’s interest rate policy statement release at 2 p.m. Eastern.

Long-term Treasury yields fell. The yield on the two-year Treasury, which tends to track market expectations of future Fed action, slid to 4.45% from 4.55% shortly before the Fed released its statement. The yield on the 10-year Treasury, which helps set mortgage rates, fell to 3.98% from 4.03%.

The Fed’s move raised its key short-term rate to a range of 3.75% to 4%, its highest level in 15 years. It was the central bank’s sixth rate hike this year, a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of a recession.

But in a statement, the Fed suggested that it could soon shift to a more deliberate pace of rate increases. It said that in coming months it would consider the cumulative impact of its large rate hikes on the economy. It noted that its rate hikes take time to fully affect growth and inflation.

“We believe that today’s decision opens the door for a 0.5% hike at the December 14th FOMC meeting, data permitting,” said Gargi Chadudhuri, head of iShares Investment Strategy, Americas.

Markets will be watching closely to see what Fed Chair Jerome Powell says about the central bank’s outlook for how long rates will need to stay high to fight inflation during an afternoon press conference.

Investors will be looking for any hints about what the central bank’s next move will be at its final meeting of the year in December.

The path ahead for the Fed is closely tied to whether inflation cools from its hottest levels in four decades. Wall Street is concerned about inflation squeezing consumers and businesses while worries grow that the Fed could bring on a recession by slowing the economy too much.

“At the end of the day, the markets like certainty and they don’t have certainty from the Fed,” said Ryan Grabinski, managing director of investment strategy at Strategas, a Baird company.

Powell has warned that the central bank’s fight against inflation would likely come with “some pain.”

Wall Street has been closely watching the latest economic data, which is heavy on the employment market this week. It has remained strong despite inflation, which is being taken as a sign that the Fed will have to remain aggressive in its fight against high prices.

The latest jobs data from private payroll company ADP shows that companies added positions at a greater pace than expected in October. The report follows hotter-than-expected data from the government Tuesday on job openings.

“It’s sort of confirming that the Fed still has more work to do,” Grabinski said.

Investors will get more employment data with the government’s weekly unemployment report on Thursday and a broader monthly jobs report on Friday. They have been closely watching the latest round of company earnings to get a better sense of inflation’s impact on corporate profits and outlooks. It’s been a mixed bag so far.

Most of the 11 sectors in the S&P 500 rose following the Fed statement, with technology stocks, banks and health care companies driving much of the gains.

Drugstore operator CVS rose 4.5% after raising its profit forecast following a strong third quarter. Casino operator Caesars Entertainment rose 6.4% after beating Wall Street’s third-quarter profit and revenue forecasts.

Short-term vacation rental marketplace Airbnb fell 8.3% after warning investors that bookings growth will slow in the fourth quarter. Beauty products maker Estee Lauder slid 5.4% after slashing its profit forecast as COVID-19 lockdowns in China and inflation hurt business.

Markets in Asia were mostly higher and markets in Europe were mostly lower.

Yuri Kageyama and Matt Ott contributed to this report.