Stocks rallied, halting a five-day rout that took 10% off the S&P 500, after Federal Reserve Chair Jerome Powell said outsize rate hikes will be rare as officials intensify their battle against sky-high inflation.
Treasury yields tumbled alongside the dollar.
Equities pushed higher amid wild swings as the central bank raised rates by 75 basis points – the biggest increase since 1994 – and Powell said officials could move by that much in July or make a smaller half-point hike.
While “it will take some time” to get inflation back down, the Fed chief is confident that “we will do that.” His remarks sent two-year Treasury yields sinking as much as 24 basis points.
“The Fed nailed it,” said Ronald Temple, co-head of multi-asset and head of US equity at Lazard Asset Management. “The Fed demonstrated its resolve to tame inflation without undermining its employment mandate.
“While some spectators argued for an even steeper hike, the Fed understood that the combination of rate hikes and QT already takes the US into uncharted territory with significant risks to growth,” he said, referring to quantitative tightening.
Powell and his colleagues on Wednesday intensified their effort to cool prices by lifting the target range for the federal funds rate to 1.5% to 1.75%.
Officials projected raising it to 3.4% by year-end, implying another 175 basis points of tightening this year.
The Fed also reiterated it will shrink its massive balance sheet by $47.5 billion a month – a move that took effect June 1 – stepping up to $95 billion in September.
Barclays, which was among the first major banks to shift its Fed prediction for June to a 75-basis-point hike, said it anticipates the central bank will return to hiking at a 50-basis-point pace in July.
Meantime, T. Rowe Price Group, manager of $1.4 trillion in assets, said investors should buy bonds now because it’s the “most attractive point” in years.
The Fed’s so-called dot plot, which the U.S. central bank uses to signal its outlook for the path of interest rates, shows the median year-end projection for the federal funds rate moved up to 3.4%. The estimate for the end of 2023 was boosted to near 3.8%.
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