Wall Street rebounded and closed at its highest level in six months after the Federal Reserve's announcement to contain inflation
The Fed raised the benchmark by 0.25 points but clarified that there are signs inflation is slowing, which got investors excited< /h2>
The New York Stock Exchange (REUTERS/Andrew Kelly)
Stocks rose on Wall Street on Wednesday after the latest interest rate hike by the Federal Reserve, which said it was finally improvement in inflation noted.
Wall Street rose to its highest level in six months: the S&P 500 rallied from an initial 1% loss on Wednesday and rose 1%. The Nasdaq gained 2% and the Dow Jones barely gained.
As expected, the Federal Reserve raised its benchmark interest rate by0.25 percentage points, to its highest level since the end of 2007. This is the smallest such increase in a flurry of Fed rate hikes since March.
The most important thing for markets is where interest rates are headed now.
Much of Wall Street expects the cooling of inflationfrom the summer means that the Federal Reserve could raise rates a bit more, before taking a pause and then possibly cutting rates towards the end of the year. Rate cuts can ease pressure on the economy and boost investment prices.
Fed Chairman Jerome Powell< /b>, said on Wednesday that “continued increases” in interest rates will be needed to bring inflation down to its target level. And he claimed it was too soon to declare victory over inflation. But he also said: “Now we can say, I think for the first time, that the disinflationary process has begun.”
Jerome Powell on a screen at the Stock Exchange (REUTERS/Andrew Kelly)
What is at stake is the economy, which many investors see probably headed for one of two paths: a relatively short and shallow recession or a much deeper and more painful one. Hopes for the former helped stocks rally in January and start the year strong.
But a third path is also possible, said Rich Weiss, a senior vice president at American Century Investments: the one that occurred during the 1970s, when inflation reignited after the Federal Reserve cut interest rates too soon.
“We are headed for a recession one way or another, whether or not the Federal Reserve eases the brakes,” Weiss said. “So they might as well kill inflation while they're at it. I think it makes no sense to think that the Fed is going to magically lift its foot at exactly the right moment and slide into a short, shallow slowdown and the stock market will walk away unscathed.”
Powell was more optimistic. “My baseline assumption is that the economy can return to 2% inflation without a really significant slowdown or a really big increase in unemployment,” he said. “It is a possible result. I think a lot of analysts would say it's not the most likely outcome, but I'd say there's a chance.”
He also said he didn't expect to cut rates this year.
Stockbrokers in New York (REUTERS/Andrew Kelly)
Higher interest rates try to stifle inflation by slowing the economy and dragging down prices stocks and other investments. The Fed has already set its overnight interest rate to its highest level since 2007, between 4.50% and 4.75%, up from near zero at the beginning of last year.
One area influencing Fed expectations is the labor market, which has remained resilient despite all the rate hikes of the past year. While the strength of the labor market helps workers, there is concern that wage increases that are too high could trigger inflation.
Reports on Wednesday offered a mixed picture on hiring. Private payrolls increased by 106,000 in January, according to ADP. This is a slowdown from the previous month's growth of 253,000, well below the 170,000 economists had expected.
But a separate US government report indicated more strength. The number of job openings rose to 11 million in December, better than the slowdown to 10.3 million economists had expected. The most comprehensive report on the US labor market will arrive on Friday.
An Institute for Supply Management report showing that the US manufacturing sector weakened more than expected last month added to the confusion about the economy. It was the third straight month of contraction.
Treasury yieldsthey fell as Powell spoke, an indication of expectations for a looser Fed. The two-year yield, which tends to follow Fed expectations, fell to 4.12% from 4.21% on Tuesday. The 10-year yield, which helps set rates for mortgages and other major loans, fell to 3.40% from 3.51% on Tuesday.
In the international markets, European stocks were mixed.
Wednesday's data showed that the European inflation rate eased at the start of the year, bringing some relief to the consumers. However, prices remain high, prompting a series of protests, and will likely put pressure on the European Central Bank to raise interest rates again on Thursday.
In Asia, shares in Shanghai gained 0.9% after surveys showed Chinese factory activity rose in January but remains weak amid weak global demand and COVID-19 outbreaks that business was disrupted.
(With information from AP)