Wall Street Rallies as Fed Holds Rates Steady and Hints Its Hikes May Be Done

Wall Street closed higher on Wednesday after the Federal Reserve left interest rates where they were and suggested it may not have to push the economy any harder. The S&P 500 rose 1.1%, the Dow Jones Industrial Average gained 221 points, and the Nasdaq composite jumped 1.6%. Treasury yields eased in the bond market after the announcement.

The decision itself was what investors expected. Over the past year and a half, the Fed has lifted its overnight rate from nearly zero early last year to above 5.25%, the highest since 2001. At a news conference in the afternoon, Chair Jerome Powell said the central bank still isn't sure that rate is high enough to bring inflation back to its 2% target, which kept the possibility of more hikes alive. He also said rate cuts, which can act like steroids for financial markets, aren't on officials' minds right now.

The market took heart from something else he said. Powell acknowledged that a recent run higher in longer-term Treasury yields, and the stock-price tumble that came with it, are working on their own to slow the economy. If that persists, he said, it could help the Fed bring down inflation without further rate increases. The jump in yields has already pushed the average 30-year fixed mortgage rate to nearly 8%, and he said those higher costs will weigh on economic activity if the tightening continues. The Fed also has time to hold still and assess the effects of its hikes. "It takes time, we know that, and you can't rush it," Powell said. "Slowing down is giving us a better sense of how much more we need to do, if we need to do more."

Longer-term yields have been climbing since the spring, catching up with the Fed's short-term rate as the U.S. economy stayed remarkably resilient and the central bank warned it might keep rates high for a long time. Last month the 10-year yield topped 5%, its highest since 2007, up from less than 3.50% in the spring. High yields drag down stock prices and make borrowing costlier for nearly everyone. On Wednesday the 10-year yield fell to 4.76% from 4.92% late Tuesday, much of the drop coming after the Fed's remarks.

Yields had already been sliding in the morning, after three economic reports painted a mixed picture. A report from ADP suggested private employers accelerated hiring last month, though by less than economists expected. Another showed employers advertised slightly more job openings at the end of September than forecast, when the Fed has been hoping for softening that could ease inflation without widespread layoffs. A third showed U.S. manufacturing contracted by more than economists had predicted last month. The government's more comprehensive jobs report arrives Friday.

Corporate earnings were a counterweight. Big U.S. companies have kept reporting stronger summer profits than analysts expected, though that hasn't often been enough lately to offset worries about yields. DuPont fell 7.6% despite a better-than-forecast quarterly profit, because its full-year 2023 outlook fell short of expectations amid weakness in China and other challenges. Estee Lauder dropped 18.6% after cutting some fiscal-year forecasts, citing slower growth in China among other factors, and reporting weaker-than-expected quarterly revenue.

Chipmaker Advanced Micro Devices rose 9.6% on stronger profit and revenue than forecast. Its year-end revenue outlook disappointed some analysts, but it pointed to growth in 2024 from the artificial-intelligence boom. Big Tech and other high-growth stocks, which benefit most from easier rates, were broad winners. Gains of 2.6% for Microsoft, 1.9% for Apple and 3.8% for Nvidia did the most to lift the S&P 500. Indexes were mostly higher across Europe and Asia.

Friday's jobs report is the next test, along with whether yields stay high enough to keep cooling the economy without the Fed's help.