US stocks and government bond prices swung higher on Wednesday afternoon after the Federal Reserve announced a further slowdown in the pace of interest rate rises.
The US central bank lifted its benchmark interest rate by 0.25 percentage points to a range of 4.5 per cent to 4.75 per cent, the highest level since September 2007. The widely expected move in the federal funds rate was less than previous increases of 0.5 or 0.75 percentage points undertaken since last spring.
The Fed’s smaller rate increase after its first monetary policy meeting of the year reflects growing confidence that inflation is on a downward trajectory after several months of encouraging data.
Wall Street’s benchmark S&P 500 index, which had slipped earlier in the day, rebounded as Fed chair Jay Powell spoke to reporters and was 1.7 per cent higher in late afternoon trading. The tech-heavy Nasdaq Composite jumped 2.6 per cent.
Powell continued to stress the need for further rate rises to bring inflation firmly under control, and said policymakers would not become “complacent” despite encouraging recent data.
However, Michael de Pass, head of linear rates trading at Citadel Securities, said investors were encouraged by Powell’s relaxed comments about a recent rally in stock and bond prices.
The S&P 500 rose 6 per cent in January while bond yields fell, making it easier for companies to raise cash. Powell had warned about the need for caution during similar rallies last year, but when asked about the trend on Wednesday, he said “our focus is not on short-term moves”, stressing that conditions had “tightened significantly over the past year”.
“There was some consensus prior to the meeting that the one area he’d try to push back on was the easing of financial conditions, but that was not the path he took,” de Pass said.
Bond markets also rallied, with the yield on the benchmark 10-year Treasury dropping 0.13 percentage points to 3.40 per cent. Bond yields fall when prices rise.
The dollar index, which tracks the US currency against a basket of peers, fell 0.9 per cent. The dollar has devalued significantly in recent months as the pace of interest rate rises has slowed.
The Bank of England and European Central Bank are due to implement their own interest rate increases on Thursday, with both expected to opt for half percentage-point adjustments upwards.
The regional Stoxx Europe 600 traded flat after eurozone inflation fell more than expected to 8.5 per cent in January, down from 9.2 per cent in December. Economists polled by Reuters had forecast a decline to 9 per cent. Core inflation, which omits relatively volatile food and energy prices, remained at 5.2 per cent, with investors having expected a decline to 5.1 per cent. London’s FTSE 100 also fell 0.1 per cent.
In Asia, Hong Kong’s Hang Seng index added 1 per cent, China’s CSI 300 rose 0.9 per cent and South Korea’s Kospi gained 1.2 per cent. Japan’s Nikkei was steady.