Technology companies led a rally for stocks on Wall Street Wednesday after the Federal Reserve said it would accelerate its pullback of economic stimulus and likely raise interest rates three times next year to tackle rising inflation.
The central bank plans to shrink its monthly bond purchases at twice the pace it previously announced, likely ending them altogether in March. The bond purchases were intended to hold down long-term rates to aid the economy but are no longer needed with unemployment falling and inflation at a near-40-year high. The accelerated timetable puts the Fed on a path to start raising rates as early as the first half of next year.
The major stock indexes rose tentatively after having been down before the release of the Fed’s statement at 2 p.m. Eastern, then gained momentum toward the end of the day. The S&P 500 rose 1.6%, nearly recouping all of its losses from the previous two days. The benchmark index ended just below the record high it set last Friday.
The Dow Jones Industrial Average rose 1.1% and the tech-heavy Nasdaq composite gained 2.2%. The Russell 2000 index of smaller-company stocks rose 1.6%. Bond yields edged higher.
The central bank’s policymakers, holding their last meeting of the year, had been widely expected to announce a faster pullback of its stimulus measures as inflationary pressures build.
“The market is interpreting this as no big surprise,” said Liz Young, chief investment strategist at SoFi. “The market was more worried about inflation.”
Businesses have been dealing with supply chain problems and higher costs for months. It has been a key concern for investors as big companies pass those costs off to consumers, who have so far been absorbing higher prices on everything from groceries to clothing and other consumer products.
On Tuesday, the Labor Department reported that prices at the wholesale level surged 9.6% in November from a year earlier. The department’s producer price index measures inflation before it reaches consumers. That followed a report Friday showing that consumer prices surged 6.8% for the 12 months ending in November, the biggest increase in 39 years.
By speeding the reduction in its bond purchases and signaling three rate hikes next year, the central bank “is signaling that it is taking inflation seriously and, so far, the market believes that the Fed will successfully fight inflation,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
Bond investors had a more measured reaction to the Fed announcement. Bond yields edged higher, with the yield on the 10-year Treasury rising to 1.45% from 1.44% late Tuesday.
Short-term Treasury yields have been rising in recent months with expectations for Fed rate increases. But the yield on the 10-year Treasury, which shows how investors are feeling about future economic growth and inflation, is still below where it was in the spring.
“Rates are warning the Fed not to go too far” and not to be overly aggressive in raising rates, said Scott Kimball, co-head of U.S. fixed income for BMO Global Asset Management. “The growth outlook based on the 10-year Treasury — what that’s implying is a cautionary story for the Fed.”
Concerns over the impact from the Fed’s actions, along with the latest coronavirus variant, have made for choppy trading as the market approaches the close of 2021. Even so, the S&P 500 is on up about 25% this year.
More than 80% of the stocks in the S&P 500 rose, with technology and health care companies accounting for much of the gains. Apple, which along with most technology stocks was coming off a two-day skid, rose 2.9%. Eli Lilly jumped 10.4% for the biggest gain in the S&P 500 after giving investors an encouraging update on its financial forecasts and drug development.
Retailers and other companies that rely on consumer spending recovered from an early slide. The sector had been down following the latest retail sales report from the Commerce Department. Sales rose a modest 0.3% in November, but fell short of economists’ forecasts amid concerns that rising costs could crimp consumer spending.
Investors should avoid placing too much value on the stock market’s immediate reaction to a Fed decision, Kimball warned.
“The initial reaction the day of can lead you astray,” he said. “I think you’ve seen some read-through from stocks that the economy’s growth component must be doing really well … but the next few days are going to tell you more.”