Wall Street equities finished sharply higher on Wednesday after the US Federal Reserve announced its second 0.75 percentage point interest rate rise in two months.
The increase in the federal funds rate to 2.25 per cent to 2.50 per cent was widely expected, and investors were encouraged as Fed chair Jay Powell said the central bank may soon slow the pace of further rises.
“At some point it will be appropriate to slow down. . . We might do another unusually large increase [in September] but that’s not a decision that we’ve made at all, we’re going to be guided by the data,” he said.
The S&P 500 index of blue-chip US stocks jumped as Powell spoke and ended 2.6 per cent higher for the day. The tech-dominated Nasdaq Composite index leapt 4.1 per cent, its largest daily increase since April 2020.
US Treasury bond prices were volatile. The yield on the two-year note, which falls when prices rise and closely tracks monetary policy expectations, fell 0.08 percentage points to 2.97 per cent.
The 10-year Treasury yield also rallied as Powell spoke, but reversed course later in the afternoon and swung to 2.79 per cent, unchanged for the day. The yield has fallen from about 3.5 per cent in mid-June as signs of slowing economic growth lead investors to scale back expectations for the pace of future rate rises. The Fed first began lifting rates in March in an attempt to rein in surging inflation.
Rajesh Nakadi, head of investments, global family office, at BNY Mellon Wealth Management said that indications of a more hawkish future policy stance were softened when Powell suggested interest rates were approaching a neutral range and the Fed would be guided by data.
“Going forward, if we’re expecting the regime to be data dependent, that probably indicates a lower probability of large hikes in future meetings,” Nakadi said.
Reassuring earnings reports from tech titans Microsoft and Alphabet had boosted markets earlier on Wednesday. Microsoft’s second-quarter earnings, reported after markets closed on Tuesday, missed analyst forecasts, but investors were encouraged by confident full-year forecasts. The company’s stock rose 6.6 per cent.
Google parent Alphabet jumped 7.7 per cent despite reporting its slowest revenue growth in two years. Quarterly revenue of $69.7bn was below average analyst forecasts, but the stock had already fallen 8 per cent over the previous three sessions as investors anticipated a miss.
The Nasdaq has dropped by almost a quarter this year as higher interest rates and surging inflation reduced investors’ appetite for buying tech companies’ long-term growth stories.
Louise Dudley, global equities portfolio manager at Federated Hermes, said the corporate results helped “offer some stability to markets”, though Paul Jackson, head of asset allocation research at Invesco, cautioned that the latest rally might not hold.
“The markets are very fragile and you get moments of pessimism followed by moments of hope,” he said. “After big declines in markets you’ve got people looking to buy into good news and to find something to believe in.”
In European equities, the regional Stoxx 600 share index added 0.5 per cent, while London’s FTSE 100 rose 0.6 per cent.
Additional reporting by Kate Duguid in New York