U.S. stocks jumped Wednesday afternoon as investors considered the Federal Reserve’s latest monetary policy decision. In this, the central bank hiked interest rates 75 basis points, or the most since 1994, and suggested a similar move could take place next month.
The S&P 500 jumped by about 1.5% by market close to end a five-day losing streak and close at 3,789.91. The Nasdaq Composite rose by 2.5% to close at 11,099.15, and the Dow added about 300 points, or 1% for a close of 30,668.27.
Treasury yields held lower and the benchmark 10-year yield pulled back from a more than decade-high to hold just above 3.4%. The monetary policy-sensitive two-year yield also pulled back from a 15-year high. Bitcoin prices (BTC-USD) remained in the red after sinking to a fresh Dec. 2020 low of just over $20,000 earlier in the day.
The Federal Reserve opted to raise interest rates by 75 basis points in June, following a 50 basis point rate hike in May. During a press conference Wednesday afternoon, Fed Chair Jerome Powell also said a 50 or 75 basis point rate hike “seems most likely” for the Fed’s next meeting in July, and in doing so implied suggested an even larger interest rate hike of a full percentage point was unlikely in the near-term.
Investors had begun to price in an increased probability of a 75 basis poinnt rate hike over the past several days, after fresh economic data suggested the Fed’s previous, more measured moves on rates had so far done little to address inflation. Consumer prices unexpectedly rose to set a fresh 40-year high in May. And other recent data showed consumers’ inflation near-term expectations have crept to near or all-time highs.
The Fed also increased its inflation forecast for the current year. The median Federal Open Market Committee member sees core personal consumption expenditures (PCE), the Fed’s preferred gauge of underlying inflation, rising by 4.3% in 2022. That compared to an estimate of 4.1% in March, the last time the Fed provided an updated set of projections. For 2023, the Fed sees core PCE rising by 2.7% before slowing to 2.3% in 2024.
At the same time, however, the Fed’s assumptions for U.S. GDP and unemployment soured this month compared to March. The median FOMC member now sees real GDP rising 1.7% this year and in 2023, down markedly from the previous median estimate for 2.8% and 2.2%, respectively. The Fed also sees the unemployment rate edging up to 3.7% by the end of this year, rather than dipping back to the pre-pandemic multi-decade low of 3.5% as the Fed had predicted in March.
And heading into Wednesday’s decision, some pundits had been less supportive of a 75 basis point hike and cast doubt about whether it would ultimately be a net positive for the economy. The Fed’s rate decision was also not unanimous, with Kansas City Fed President dissenting and opting instead for a 50 basis point rate increase.
The risk of the Fed over-tightening, or raising interest rates more swiftly than markets and the economy can adjust to, could ultimately do more damage than good, some strategists argued ahead of Wednesday’s decision. In his press conference, Powell also suggested he acknowledged this balancing act, noting, “There’s always a risk of going too far or going not far enough” while adding failing to restore price stability would be “the worst mistake we could make.” And the economy has already shown signs of softening: A new report just Wednesday morning showed U.S. retail sales unexpectedly declined in May, as rising gas prices prompted consumers to pull back spending in other areas.
“Our objection to this more aggressive action is that it is unnecessary, because the forces which have driven the recent inflation numbers are already fading,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, wrote in a note Wednesday before the release of the Fed decision.”Slower wage gains, along with the rollover in the housing market, will depress rent growth, while airline fares are likely to fall over the summer in the wake of falling jet fuel prices, and vehicle prices will drop as inventories rise.”
“The inflation fix will not be more effective if the Fed hikes by 75bp [basis points] today or next month, rather than 25bp, and the damage done to private sector wealth could inadvertently trigger a downturn which otherwise would be averted,” Shepherdson added. “Less is not always more, but sometimes it is enough.”
On the move
Boeing (BA) shares added to Tuesday’s gains after the company said it delivered a total of 35 aircraft in May, more than doubling last year’s tally of 17. The majority of these were for its lucrative 737 Max jet. Separately, The Seattle Times, citing a Federal Aviation Administration official, reported Boeing may be able to resume 787 Dreamliner deliveries in the coming weeks.
Revlon (REV) shares sharply rose for a second straight day, gaining 17% intraday to build on Tuesday’s nearly 60% gain. The stock posted its biggest one-day decline on record last week, falling more than 50% in a single day, after the cosmetics company was reportedly preparing to file for Chapter 11 bankruptcy.
Baidu (BIDU) shares rose after Reuters reported the Chinese internet giant has been in talks to sell its majority stake in streaming business iQiyi. The deal could reportedly value the firm around $7 billion.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter.