Stocks closed near session highs after Federal Reserve Chair Jerome Powell struck a more positive tone on the prospects for economic growth as the central bank raised interest rates for the first time since 2018. Bonds retreated.
The S&P 500 posted its biggest two-day rally since April 2020 as Powell said the “economy is very strong” to handle tighter policy and the probability of a recession is “not particularly elevated.” Treasury yields rose, led by rates at the front end of the curve. Swaps linked to policy announcement dates at one stage indicated at least 75 basis points of hikes would take place over the coming two meetings, suggesting one of the anticipated moves from the central bank might be bigger than the standard size of 25 basis points.
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The Fed raised rates by a quarter percentage point Wednesday and signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades even as risks to economic growth mount. The central bank said it would begin allowing its $8.9 trillion balance sheet to shrink at a “coming meeting” without elaborating. Powell said officials had made good progress this week in nailing down their plans and could be in a position to begin the process at their May meeting.
“The Fed finally made it official — no surprises there,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley. “That said, the Fed raising rates means a vote of confidence that the economy is in shape enough to weather tighter policies.”
For Guggenheim Partners Chief Investment Officer Scott Minerd, the Fed is in an “inflation panic” as it begins to tighten monetary policy in response to inflation. The central bank has paid too much attention to financial markets at the expense of its job to control money supply and manage its balance sheet, he said during an interview on Bloomberg Television.
“The Fed has largely abandoned monetary orthodoxy,” he added. “It’s trying to be too cute in how it’s managing this.”
Traders also monitored the latest geopolitical developments. Ukrainian President Volodymyr Zelenskiy delivered an emotional address to the U.S. Congress while President Joe Biden offered hundreds of millions of dollars’ worth of new weaponry and called Russian President Vladimir Putin a “war criminal.” After talks between Russia and Ukraine, a Kremlin spokesman said that a neutral Ukraine with its own army could be a possible compromise in the current crisis, while Kyiv said it needed firm security guarantees in any outcome.
Here are some key events to watch this week:
Bank of England rate decision, Thursday
ECB President Christine Lagarde, Executive Board member Isabel Schnabel, Governing Council member Ignazio Visco and Chief Economist Philip Lane speak at a conference, Thursday
Bank of Japan rate decision, Friday
Some of the main moves in markets:
The S&P 500 rose 2.2% as of 4 p.m. New York time
The Nasdaq 100 rose 3.7%
The Dow Jones Industrial Average rose 1.5%
The MSCI World index rose 2.9%
The Bloomberg Dollar Spot Index fell 0.7%
The euro rose 0.8% to $1.1040
The British pound rose 0.8% to $1.3146
The Japanese yen fell 0.3% to 118.63 per dollar
The yield on 10-year Treasuries advanced three basis points to 2.18%
Germany’s 10-year yield advanced six basis points to 0.39%
Britain’s 10-year yield advanced five basis points to 1.63%
West Texas Intermediate crude fell 1.4% to $95.08 a barrel
Gold futures were little changed
–With assistance from Emily Barrett, Sunil Jagtiani, Robert Brand, Vildana Hajric, Emily Graffeo, Jennifer Bissell-Linsk and Isabelle Lee.