Stocks hit summer highs as Fed sees progress

NEW YORK — Wall Street climbed Wednesday to its best level since the summer following the latest hike to interest rates by the Federal Reserve, which said it’s finally seeing improvements in inflation.

The S&P 500 rallied back from an early 1 percent loss to rise 1 percent after Fed Chair Jerome Powell said the economy is on the path toward getting inflation lower. The Dow Jones Industrial Average erased a drop of 500 points to rise 6, while the Nasdaq composite jumped 2 percent.

As expected, the Fed raised its benchmark interest rate by 0.25 percentage points to its highest level since late 2007. It’s the smallest such increase in the Fed’s blizzard of rate hikes since March.

What’s more important for markets is where interest rates are heading next.

Much of Wall Street is hoping that cooling inflation since the summertime means the Fed may raise rates just a bit more, before taking a pause and then possibly cutting rates toward the end of the year. Rate cuts can ease pressure on the economy and juice investment prices.

The Fed’s Powell did reiterate Wednesday that “ongoing increases” in interest rates will be needed to bring inflation down to the Fed’s target level. And he said it was still way too early to declare victory over inflation.

But he also said, “We can now say, I think for the first time, that the disinflationary process has started.” That got Wall Street thinking about a future with no more rate increases.

Higher interest rates try to snuff out inflation by slowing the economy and dragging on prices for stocks and other investments. The Fed has already pulled its key overnight rate to its highest level since 2007, at a range of 4.50 percent to 4.75 percent, up from virtually zero early last year.

At stake is the economy, which many investors see likely heading down one of two paths: either a relatively short and shallow recession or a much deeper and more painful one. Building hopes for the former helped stocks rally through January to a strong start of the year.

Powell indicated he’s on the more optimistic side.

“My base case is that the economy can return to 2 percent inflation without a really significant downturn or really big increase in unemployment,” he said.

He also said he did not foresee any rate cuts this year.

All told, the S&P 500 rose 42.61 to 4,119.21, its highest close since August. The Dow gained 6.92, or less than 0.1 percent, to 34,092.96, and the Nasdaq jumped 231.77 to 11,816.32.