Stocks surge on Fed’s inflation assessment

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

The Standard & Poor’s 500 index rallied back from an early 1% loss to rise 1% after Fed Chair Jerome H. Powell said the economy is on the path toward lower inflation. The Dow Jones industrial average erased a 500-point drop to end barely changed, while the Nasdaq composite climbed 2%.

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 inf lation 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.

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 inf lation 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 4.25% to 4.50%, up from virtually zero early last year.

At stake is the economy, which many investors see probably heading down one of two paths: either a relatively short and shallow recession or a much deeper and more painful one.

Powell indicated he’s on the more optimistic side.

“My base case is that the economy can return to 2% inf lation 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.

Reports on Wednesday gave a mixed picture on hiring. Private payrolls rose by 106,000 in January, according to ADP. That’s a slowdown from a month earlier, and was below economists’ expectations.

Treasury yields fell as Powell spoke, a sign of expectations for an easier Fed.

The two-year yield, which tends to track expectations for the Fed, fell to 4.11% from 4.21% late Tuesday. The 10year yield, which helps set rates for mortgages and other key loans, fell to 3.42% from 3.51% late Tuesday.

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