U.S. stocks are rising Wednesday after the head of the Federal Reserve said the cuts to interest rates that Wall Street craves so much are still likely, even if they’re delayed because of stubbornly high inflation.
The S&P 500 was up 0.3% in late trading after the Fed held its main interest rate at its highest level since 2001, just as markets expected. The Dow Jones Industrial Average was up 276 points, or 0.7%, as of 3:38 p.m. Eastern time, and the Nasdaq composite was 0.6% higher.
Federal Reserve Chair Jerome Powell said out loud the fear that’s recently sent stock prices lower and erased traders’ hopes for imminent cuts to interest rates: “In recent months, inflation has shown a lack of further progress toward our 2% objective.” He also said that it will likely take “longer than previously expected” to get confident enough to cut rates, a move that would ease pressure on the economy and investment prices.
At the same time, though, he calmed a fear swirling in the market, that inflation has been so high that additional hikes to rates may be necessary.
“I think it’s unlikely that the next policy rate move will be a hike,” Powell said. Stocks climbed immediately afterward.
The Fed also offered financial markets some assistance by saying it would slow the pace of how much it’s shrinking its holdings of Treasurys. Such a move could grease the trading wheels in the financial system, offering stability in the bond market. Powell said the Fed did it to reduce “risk of money markets showing stress.”
Yields eased in the bond market following the move and Powell’s comments.
The yield on the 10-year Treasury fell to to 4.62% from 4.65% just before the announcement, easing the pressure on the stock market. The yield on the two-year Treasury yield, which more closely tracks expectations for the Fed, dropped to 4.95% from 5.04% late Tuesday.
Traders themselves had already downgraded their expectations for rate cuts this year down to one or two, if any, after coming into the year forecasting six or more. That’s because they saw the same string of reports as the Fed, which showed inflation remaining stubbornly higher than forecast this year.
Powell had already recently hinted rates may stay high for a while as Fed officials waited for more confirmation inflation is heading down toward their 2% target. That was a disappointment for Wall Street, after the Fed earlier had indicated it was penciling in three cuts to rates during 2024.
Powell’s comments Wednesday were largely seen as less harsh than feared.
“Yet, before markets get overly excited, it’s worth remembering that the Fed is responding to the unfolding economic data, just as we all are,” according to Seema Shah, chief global strategist at Principal Asset Management. “The next few months of data are pivotal for the Fed path.”
Without the benefit of easing rates, companies will need to deliver better profits to support their stock prices.
Amazon climbed 4.5% after it reported stronger profit for the latest quarter than analysts expected. The retail behemoth credited reaccelerating growth at its cloud-computing business, in part, as it benefits from demand for AI.
Chemical producer DuPont was another winner, up 8.1%, after reporting stronger profit than expected. It said demand from customers in the semiconductor industry continued to recover.
They helped offset a 16.5% tumble for CVS Health, which reported weaker results for the latest quarter than analysts expected. It said it’s been hurt by increased costs at its Medicare Advantage business, and it cut its forecast for profit over the full year.
Starbucks dropped 16.3% after falling short of expectations for both profit and revenue in the latest quarter. Sales trends weakened at its stores outside the United States in particular, and it cut its full-year forecasts for profit and revenue.
Super Micro Computer, which has been one of Wall Street’s hottest stars, gave back 13.1% despite topping expectations for profit. The company, which sells server and storage systems used in AI and other computing, fell shy of analysts’ forecasts for revenue. Expectations had bult up after its stock had already tripled this year amid a broader frenzy on Wall Street around artificial-intelligence technology.
Advanced Micro Devices dropped 7.9% despite reporting profit that matched expectations. Its revenue came in a bit shy of forecasts, as did the midpoint of its forecasted range for revenue in the current quarter.
Before the Fed’s announcement, stocks and Treasury yields had been moving relatively little following some weaker-than-expected reports on the economy.
One report from the Institute for Supply Management said the U.S. manufacturing sector unexpectedly fell back into contraction last month.
A separate report said U.S. employers were advertising slightly fewer jobs at the end of March than economists expected. The hope on Wall Street has been that a cooldown there could help prevent upward pressure on inflation. The downside is that if it weakens too much, a major support for the economy could give out.
Some recent economic reports raised fears about the potential for a stagnating economy combined with high inflation. The Fed doesn’t have great tools to fix such a scenario, called “stagflation.”
But Powell downplayed the risk of that and said inflation is much lower and economic growth is much better than the last time stagflation occurred in the 1970s and 80s.
“I don’t see the ‘stag’ or the ‘flation,’” he said.
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AP Writers Matt Ott and Zimon Zhong contributed.
