US stocks eliminated previous losses and rose on Wednesday after the Federal Reserve announced it would not see rate hikes through 2023 and let inflation run hotter than usual to ensure a full economic recovery.
The Dow Jones Industrial Average gained 200 points. The S&P 500 rose 0.3%. The Nasdaq Composite erased losses, trading 0.3% higher. The tech-heavy benchmark fell 1.5% early in the session as growth stocks were hit again by rising bond yields.
While the Fed expects policy rates to stay near zero for the next two years, the central bank has improved its economic outlook to meet expectations of a stronger recovery from the pandemic-triggered recession. Gross domestic product is projected to grow 6.5% in 2021 before cooling off in later years.
Core inflation expectations have also risen, and the Committee is now targeting a 2.2% increase this year as measured by personal consumption expenditure. The central bank’s stated goal is to keep inflation at 2% over the long term.
“It sounds like the perfect investor and outlook scenario, and you are seeing the market respond to that very bullish view,” said Michael Arone, chief investment strategist at State Street Global Advisors. “Monetary policy will remain largely accommodative, almost regardless of what happens to interest rates, inflation and asset prices.”
Investors also heard from Fed Chairman Powell who his comment is likely to move equity and bond markets, although he is unlikely to offer details.
The yield on 10-year government bonds remained higher, according to the Fed, rising 4 basis points to 1.67%. At the beginning of the meeting, the key interest rate rose to 1.689% and reached a level not seen since the end of January 2020. The 30-year rate rose to 2.428%, its highest level since November 2019. Higher interest rates undermine the value of future cash flows and are particularly bad news for growth companies.
“With the 2023 median still flat, stocks and bonds are rising again,” said Anu Gaggar, senior global investment analyst at Commonwealth Financial Network. “This is like a goldilocks market – strong economic growth, moderately higher inflation, restful profits, and very simple monetary terms.”
Rising interest rates have been an overhang for stocks in the past few weeks, especially for the tech sector. The surge in yields has forced value stocks to shift away from growth, pushing the Dow Jones Industrial Average and S&P 500 near record highs.
Disney shares eliminated previous losses and gained 0.8% after CEO Bob Chapek told CNBC that California’s two Disneyland theme parks will reopen on April 30th.
McDonald’s was up 2% after Deutsche Bank upgraded the stock to buy from the hold.
– CNBC’s Patti Domm contributed to this report.