US stocks and government bond prices swung higher on Wednesday afternoon after the Federal Reserve announced a slower pace of interest rate hikes.
The US central bank raised its benchmark interest rate by 0.25 percentage points to a range of 4.5 percent to 4.75 percent, the highest level since September 2007. The expected move in the federal funds rate was less than previous increases of 0.5 or 0.75 points scored percentage since last spring.
The Fed’s smaller rate hike after its first monetary policy meeting of the year reflected growing confidence that inflation is on a downward trajectory after months of encouraging data.
Wall Street’s benchmark S&P 500 index, which had fallen during the day, rebounded as Fed chairman Jay Powell spoke to reporters and was 1.7 percent higher in afternoon trade. The tech-heavy Nasdaq Composite rose 2.6 percent.
Powell continued to emphasize the need to increase rates further to bring strong inflation under control, and said policy makers will not be “satisfied” despite encouraging new data.
However, Michael de Pass, head of linear rate trading at Citadel Securities, said investors were encouraged by Powell’s calm comments about the recent rally in stock and bond prices.
The S&P 500 rose 6 percent in January as bond yields fell, making it easier for companies to raise cash. Powell had warned of caution during a similar rally last year, but when asked about trends on Wednesday, he said “our focus is not on short-term movements”, stressing that conditions had “tightened significantly over the past year”.
“There was some consensus before the meeting that one area will try to push back on the easing of the financial situation, but that is not the way to take it,” de Pass said.
The bond market also rallied, with the yield on the benchmark 10-year Treasury down 0.13 percentage points to 3.40 percent. Bond yields fall when prices rise.
The dollar index, which tracks the U.S. currency against a basket of peers, fell 0.9 percent. The dollar has devalued significantly in recent months because the pace of interest increases has slowed.
The Bank of England and the European Central Bank will implement their own rate hikes on Thursday, with both opting for a half-percentage-point upward adjustment.
The regional Stoxx Europe 600 traded flat after euro zone inflation fell to more than 8.5 percent in January, down from 9.2 percent in December. Economists polled by Reuters had forecast a decline of 9 percent. Core inflation, which excludes relatively volatile food and energy prices, remained at 5.2 percent, with investors expected to decline to 5.1 percent. London’s FTSE 100 also fell 0.1 percent.
In Asia, Hong Kong’s Hang Seng index added 1 percent, China’s CSI 300 rose 0.9 percent and South Korea’s Kospi gained 1.2 percent. Japan’s Nikkei remained stable.