Fed raised interest rates by 25 basis points; dollar index fell to lowest level since April
U.S. stocks rose along with government bonds as Federal Reserve Chairman Jerome Powell said the central bank has made progress in its fight against inflation, even as he warned that further rate hikes are likely warranted.
The S&P 500 rose more than 1% after Powell said the "disinflation process has begun," suggesting the aggressive tightening cycle is starting to have the desired effect and reducing the pace of price growth. The Nasdaq 100 was up more than 2%.
Stock futures extended gains after the close as Meta Platforms Inc. reported revenue that beat estimates on strong demand for advertising. Shares of Facebook's parent company rose 18% in late trading.
While earnings from major companies continued to trickle in, the Federal Reserve's latest decision and comments from Powell dominated sentiment during the regular session. The two-year bond yield fell as much as 12 basis points to 4.08%, while the 10-year rate hit 3.38%. The dollar index has fallen to its lowest level since April. Swap dealers now expect rates to fall by about half a percentage point in the second half of the year.
Market optimism grew as Powell dodged a question about the latest easing of financial conditions, a measure of market tensions that the central bank monitors for policy effectiveness. He said the focus is "not on short-term moves, but on lasting changes. "Investors had been expecting harsh comments from the Fed aimed at curbing a recent surge in risk assets that could make it harder to fight inflation.
"Powell has said that financial conditions have tightened considerably, although they have loosened considerably. The fact that he said this is dovish in itself," wrote Neil Dutta, head of economics at Renaissance Macro Research. The likelihood of the Fed "declaring victory too soon" is increasing, Dutta said. The possibility of a later tougher landing is increased by the Fed's today's flirting with a soft landing.
The Fed's message was not without warnings for financial markets. The central bank said further rate hikes were likely warranted and that officials were discussing some more increases to make policy restrictive enough to fight inflation. The Fed funds rate of 4.5% to 4.75% is still more than 25 basis points below the peak expected in December.
According to Charlie Ripley, senior investment strategist at Allianz Investment Management, "the Fed is essentially speaking out of two mouths, as it has signalled that further increases are appropriate, but also acknowledged that it will consider the cumulative extent of tightening in future policy decisions.
Ripley said the Fed's comments suggest it is nearing the end of its tightening cycle and "is willing to wait until economic data are consistent with policy"
However, according to Ronald Temple, chief market strategist at Lazard, markets could once again struggle against the Fed on Wednesday.
Powell's comments, coupled with Wednesday's data showing an increase in job openings, lead Temple to believe that "markets remain too optimistic about how high interest rates will be and how long they will stay there"