Dow rallies 500 points after Powell rules out larger rate hikes
Stocks jumped Wednesday as investors digested the Federal Reserve’s big interest rate decision, where the central bank hiked rates by half a percentage point.
The Dow Jones Industrial Average rose 570 points, or 1.8%. The S&P 500 gained 1.7%. The tech heavy Nasdaq Composite rose 1.6%.
The central bank announced that it was hiking its benchmark interest rate 50-basis-points, or 0.5 percentage points. That is the biggest hike since 2000 for the Fed, but the move was widely expected by investors.
Stocks then moved sharply higher when Fed Chair Jerome Powell said the central bank was not considering a 75-basis-point hike in future meetings.
“It’s certainly heady days when the market doesn’t blink at the most aggressive rate hike in 22 years, but keep in mind this was extremely well-telegraphed and priced in. So far though, we don’t have much to go on in terms of the pace and magnitude of hikes to come,” said Mike Loewengart, managing director of investment strategy at E-Trade.
Powell said he believed the Fed could slow economic growth without causing a jump in unemployment, citing the high number of job vacancies and strong household balance sheets.
“I would say we have a good chance to have a soft, or soft-ish, landing,” Powell said.
The impact of the Fed’s tightening on economic growth has been a key concern for markets in recent monhts. The majority of respondents to the May CNBC Fed Survey indicated they expect a recession at the end of the tightening cycle.
“High inflation constrains the Fed, making easing monetary policy less likely if growth (or markets) fall. We have long argued that elevated inflation would put the Fed in a bind – when growth weakens they would not be willing to or able to ride to the rescue by loosening monetary policy,” Citi quantitative strategist Alexander Saunders said in a note to clients.
Fed Chair Jerome Powell repeatedly said inflation was “much too high” during his press conference and commented that additional 50-basis-point hikes would be on the table at upcoming meetings.
Ahead of the Fed meeting, some Wall Street strategists suggested that markets could be in for a relief rally despite the rate hike. After the first increase in March, the S&P 500 jumped more than 6% in the following weeks before pulling back again in April.
This year, stocks have fallen sharply and Treasury yields have spiked, but it is not clear if the market has fully accounted for an aggressive Fed. The benchmark 10-year Treasury yield topped 3% again on Wednesday morning, trading near its highest level since 2018.
“Volatility is likely to continue. Rate hikes have just begun, inflation looks sticky, many geopolitical issues have no obvious offramp, and midterm election rhetoric is just ramping up,” Baird’s Ross Mayfield said in a note to clients this week. “Though the domestic economy has been resilient, corporate earnings are hanging tough, and the U.S. consumer continues to spend, instability–driven by inflation and rates–should continue in the near-term. Have we seen this year’s market low? Possibly not.”
Large tech stocks were mixed on the day, contributing to the choppy trading. Apple rose more than 1%, while Amazon shed 1.6% and Netflix dropped 2%.
Corporate earnings reports were leading to notable moves on Wednesday. Lyft plummeted 29% after the ridesharing company shared on Tuesday evening weak guidance for the current quarter as it expects to invest in driver supply. Rival Uber dropped 8%.
Elsewhere, chipmaker Advanced Micro Devices also moved higher following its report, gaining about 6%, after beating estimates and delivering strong guidance. Casino stock Caesars Entertainment was under pressure after the company missed estimates on the top and bottom lines.
Airbnb rose 3.6% as the company expects a continued travel rebound, and Starbucks added 2.4% after topping revenue estimates. CVS Health rose 2.5% after beating estimates on the top and bottom lines.
Stocks have risen for two straight days to start May, stabilizing ahead of the Fed meeting.
The moves came as the markets attempt to recover from a brutal tech-led April sell-off that saw the Nasdaq hit its worst month since 2008. The Dow and S&P 500 also finished their worst month since March 2020.
The S&P 500 is currently trading in correction territory, down about 12.4% year to date. LPL Financial’s Ryan Detrick pointed out Tuesday the current correction parallels the size and length of previous corrections after World War II.
On the economic front, the private payrolls report from ADP showed an increase of 247,000 for April, well below the 390,000 Dow Jones estimate. The full Labor Department payrolls report for April is due out Friday.