Stocks Rise As The Fed Raises Interest Rates

U.S. stocks rose and bond yields jumped on Wednesday after the Federal Reserve officially raised interest rates for the first time since 2018.

The S&P 500 is up 1.3% in recent trading. The technology-focused Nasdaq Composite rose 2.4%, while the Dow Jones Industrial Average rose 0.5%. Indices first cut their gains after the Fed’s announcement, then bounced back during a press conference by Chairman Jerome Powell.

The Fed has raised interest rates by a quarter of a percentage point as officials seek to keep the economy from overheating and reduce inflation. The new forecasts show that most officials expect the federal funds rate to rise to at least 1.875% by the end of the year and to about 2.75% by the end of 2023. a year or more next year.

“It looks like they wanted to show that they are fighting inflation and they are going to fight it fast and get it under control,” said Cathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.

In recent weeks, some investors have lowered their forecasts for this year’s rate hike due to the Ukrainian crisis. The central bank is navigating an unusually challenging environment of a tight labor market, supply disruptions, rising inflation, Russia’s invasion of Ukraine and Covid-19 lockdowns in China – the last two of which are likely to exacerbate inflationary and supply chain problems.

Wednesday’s Fed rate hike marks the end of a historic wave of stimulus put in place when the Covid-19 pandemic first swept across the US. The pandemic brought a decades-long bull market to stocks to a halt and plunged the economy into recession. The Fed’s stimulus helped the economy recover faster than many expected. Now investors are faced with another problem: inflation has hit a 40-year high. Some are even worried about a looming recession.

The prospect of an interest rate hike by the Fed has been roiling the markets for months. The Nasdaq Composite is now on track for the longest bear market since the financial crisis. The S&P 500 is down about 10% from its high.

Bond yields rose after the announcement. The benchmark 10-year Treasury yield rose to 2.192% from 2.160% on Tuesday. Yields and prices change in the opposite direction. The sharp rise in bond yields reflects a growing bet from investors that Russia’s invasion of Ukraine will not slow down the move to raise interest rates.

U.S. retail sales data for February showed an increase in spending from the previous month as households adjust to the headwinds of a strong labor market, declining coronavirus cases and inflation at its highest annual level in 40 years.

Traders work on the New York Stock Exchange.

Photo: Xinhua/Zuma Press

Movements in the oil market were muted as investors weighed whether lockdowns in some Chinese cities would dampen energy demand, even as Russia’s incursion into Ukraine fueled fears of supply disruptions. Futures for Brent crude oil, the international benchmark, fell 1.9% to $98.02 a barrel. Higher oil prices raised concerns that the US and Europe could experience sustained inflation and lower economic growth as higher gas and energy prices eat into household spending on other goods and services.

Chinese officials said they will “coordinate pandemic prevention and control measures and economic development, keep the economy operating within reasonable limits, and ensure the smooth operation of the capital market,” China’s state news agency Xinhua said in a statement Wednesday. This helped assuage some fears of a slowdown in China, which would also undermine growth worldwide.

Tech stocks soared in Chinese markets after supportive comments from Beijing politicians. Hong Kong’s Hang Seng Index rose 9.1% on the back of tech stocks. China’s Shanghai Composite rose 3.5%.

The KraneShares CSI China Internet ETF jumped about 30% in trading after falling to a record low earlier in the week. Exchange-traded short-term iPath Series B S&P 500 VIX futures fell about 5%, continuing unusual trading.

“The rebound in Chinese equities shows how sensitive the markets are,” said Peter Garnry, head of equity strategy at Saxo Bank, noting the strong swings in the markets in recent weeks as investors follow a series of headlines.

Overseas, the pan-continental Stoxx Europe 600 climbed 3.1% on a jump in the tech sector. The Russian stock market remains closed until the end of the week.

— Joe Wallace contributed to this article.

The Federal Reserve’s primary tool for managing the economy is changing the federal funds rate, which can affect not only the cost of borrowing for consumers, but broader decisions of companies, such as how many people to hire. The WSJ explains how the Fed manipulates this single rate to drive the entire economy. Illustration: Jacob Reynolds

Write to Caitlin Ostroff, [email protected]