Stocks, yields end higher after Fed raises rates

Stocks reversed an afternoon fade and closed broadly higher Wednesday after the Federal Reserve announced its first interest rate hike since 2018.

As Wall Street largely anticipated, the central bank announced it was increasing its key short-term rate by 0.25 percentage points. The Fed, which has kept its rate near zero since the pandemic recession struck two years ago, also signaled potentially up to seven rate hikes this year.

The move marks a shift in policy by the Fed away from maintaining ultra-low interest rates as it seeks to tame inflation, which is running at the highest level since the early 1980s. Rate hikes eventually result in higher loan rates for many consumers and businesses.

Stocks lost most of their early gains and bond yields rose sharply shortly after the 2 p.m. Eastern release of the Fed's latest policy statement. The indexes wavered as Fed Chair Jerome Powell delivered remarks during a press conference before surging in the final hour of trading.

The S&P 500 rose 2.2%, the Dow Jones Industrial Average gained 1.5% and the Nasdaq composite climbed 3.8%, its biggest gain since November 2020.

Bond yields rose sharply after the Fed's announcement. The yield on the 10year Treasury rose to 2.20%, then hovered at 2.17% by late afternoon. It was at 2.15% late Tuesday. The 2-year Treasury yield rose to 2% then eased back to 1.94%, still a big move from 1.85% a day earlier.

“The market got what it expected,” said Randy Frederick, vice president of trading & derivatives at Charles Schwab. “Interest rates need to be higher. Inflation needs to be under control, and the risk to everything is a lot greater from high inflation than it is from high interest rates.”

The Fed is trying to slow the economy enough to tamp down the high inflation sweeping the country, but not so much as to trigger a recession.