Report on inflation cooling ups stocks

Investors sensing Fed will cut rate increase on Wednesday

NEW YORK — Stocks on Wall Street finished higher Tuesday after a report showed inflation cooled more than expected last month, cementing expectations that the Federal Reserve is about to dial down the size of its interest rate hikes.

The encouraging inflation data raised hopes for easing pressure on the economy ahead of an interest rate policy update on Wednesday from the Fed.

Stocks initially surged, driving the Dow Jones Industrial Average more than 700 points higher, but then pared their gains as analysts cautioned investors not to get carried away by hopes for an easier Fed, as they have in the past.

The S&P 500 ended 0.7 percent higher. An early-morning burst of

2.8 percent nearly vanished by lunchtime. It had already climbed 1.4 percent a day earlier, with much of that gain coming in the last hour of trading on anticipation of the inflation data.

The Dow Jones Industrial Average flipped briefly to a loss before ending 0.3 percent higher, while the Nasdaq composite rose 1 percent after shedding most of a 3.8 percent gain.

The source of all the action was data showing that U.S. inflation slowed to 7.1 percent last month from 7.7 percent in October and more than 9 percent in the summer.

The slowdown bolstered investors’ expectations that the Federal Reserve will downshift to an increase of 0.50 percentage points when it announces its next hike to short-term rates on Wednesday.

With with inflation coming off its worst level in generations, a 0.50 percentage hike would be a step down from the four straight 0.75 percentage points the Fed has approved since the summer.

The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, fell to 3.51 percent from 3.62 percent late Monday. The two-year yield dropped to 4.22 percent from 4.39 percent.

Technology stocks helped push the S&P 500 higher. The benchmark index added 29.09 points to close at 4,019.65. The Dow rose 103.60 points to 34,1087.64. The Nasdaq gained 113.08 points to finish at 11,256.81.

Even if the Fed is moving at smaller increments each time, it may still ultimately take rates higher than markets expect.

Some investors continue to bet the Fed will cut interest rates in the latter part of 2023.