Topline
The stock market surged higher on Wednesday after the Federal Reserve raised interest rates by 0.5% in a move widely-anticipated by investors, as the central bank continues on its path of aggressive monetary policy tightening in a bid to combat surging inflation.
Federal Reserve chair Jerome Powell.
Key Facts
Stocks moved higher following the Federal Reserve’s announcement: The Dow Jones Industrial Average was up 2.9%, over 900 points, while the S&P 500 rose 3.1% and the tech-heavy Nasdaq Composite 3.3%.
Investors cheered what was a widely expected move from the Federal Reserve, which hiked interest rates by a half-percentage point—the largest increase in over two decades—as it looks to combat historically high levels of inflation.
The central bank also indicated that it would begin reducing its $9 trillion balance sheet by offloading bonds each month: Starting in June, roughly $30 billion of Treasurys and $17.5 billion of mortgage-backed securities will be rolled off.
Traders expect the Federal Reserve to continue aggressively raising interest rates in the next few months, and with the federal funds rate now at a range of 0.75% to 1%, current market expectations are for the rate to reach 3% by the end of 2022.
The central bank’s announcement was “overall about as dovish as could be expected while still showing that the Fed is serious about fighting inflation,” according to Cliff Hodge, chief investment officer for Cornerstone Wealth.
The benchmark 10-year Treasury yield, meanwhile, briefly surpassed 3% before paring back gains somewhat, trading just below its highest level since 2018.
Crucial Quote:
The Federal Reserve “delivered what it had promised in terms of the rate hike and the balance sheet taper—and markets are reacting accordingly,” with no major sell-off occurring after the announcement, points out Quincy Krosby, chief equity strategist for LPL Financial.
What To Watch For:
The “black hole of tech negativity” in markets, with tech stocks continuing to get “demolished” as investors “puke out of this sector,” according to Vital Knowledge founder Adam Crisafulli.
Key Background:
Stocks are rebounding from a brutal sell-off in April, with experts warning of continued volatility ahead. The Dow and S&P 500 both recorded their worst month since March 2020, down 4.9% and 8.8%, respectively, while the Nasdaq posted its worst month since 2008, falling over 13%.
Further Reading:
Markets Inch Higher—But Experts Warn Of ‘Continued Volatility’ After ‘Brutal’ Stock Selloff (Forbes)
Source: https://www.forbes.com/sites/sergeiklebnikov/2022/05/04/dow-jumps-600-points-after-federal-reserve-hikes-interest-rates-by-half-percentage-point/