Fed's Hold on Rates Spurs Market Rally Amid Mixed Signals

U.S. stocks resumed their rally after the Federal Reserve left interest rates unchanged while lowering rate cut expectations for 2024. Despite some market tensions due to mixed economic signals, major indices such as the S&P 500, the Nasdaq, and the Dow saw gains, while Treasury yields and the dollar adjusted slightly.

U.S. stocks wavered but resumed their rally and U.S. Treasury yields pared earlier declines after the U.S. Federal Reserve left interest rates unchanged and lowered expectations for rate cuts this year.

The dollar shed some weakness after the Fed's policy statement and its Summary of Economic Projections (SEP) was released. The S&P 500 and the Nasdaq remained sharply higher, while the blue-chip Dow rose slightly.

The more-hawkish-than-expected SEP seemed to contradict the Labor Department's closely watched CPI report released earlier in the day, which showed core prices growing at their slowest annual pace in over three years. "It's a little disappointing to see this continued hawkishness, especially on the same day where you get one of the softest inflation reports in probably a couple of years," said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. "The market is going to struggle a bit with how hawkish the Fed is in light of all of not only this morning's data, but last week’s as well."

In his press conference following the decision, Fed Chair Jerome Powell acknowledged that inflation has eased substantially but remains too high and rate-cut expectations have been pushed out due to slower-than-expected progress in bringing price growth down to the central bank's 2% goal. "I think the main takeaway will be that the market was probably expecting the Fed to shift the dot plot from three cuts to two cuts," Mayfield added. "Instead it was shifted from three cuts to one cut, which on margin is a hawkish surprise."

Still, financial markets are pricing in a 61.5% likelihood of a 25-basis-point rate cut in September, up from 46.8% on Tuesday, according to CME's FedWatch tool. The Dow Jones Industrial Average rose 30.69 points, or 0.08%, to 38,778.11, the S&P 500 gained 58.74 points, or 1.09%, to 5,434.06 and the Nasdaq Composite added 326.91 points, or 1.88%, to 17,670.45.

European shares closed sharply higher after the CPI report and prior to the Fed's rate decision. The pan-European STOXX 600 index rose 1.08% and MSCI's gauge of stocks across the globe gained 1.07%.

Emerging-market stocks rose 0.45%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.57% higher, while Japan's Nikkei lost 0.66%. U.S. Treasury yields slid after the data, but retraced a bit after the SEP release.

U.S. benchmark 10-year Treasury notes last rose 25/32 in price to yield 4.3044%, from 4.402% late on Tuesday. The 30-year bond last rose 42/32 in price to yield 4.4556%, from 4.535% late on Tuesday.

The dollar pared its losses against a basket of world currencies after the central bank cut its 2024 rate-cut expectations. The dollar index fell 0.53%, with the euro up 0.69% to $1.0813.

The Japanese yen strengthened 0.33% versus the greenback at 156.61 per dollar, while Sterling was last trading at $1.2811, up 0.56% on the day. Oil prices advanced, supported by simmering tensions in the Middle East, and by forecasts that global inventories will fall in the latter half of the year.

U.S. crude rose 0.77% to settle at $78.50 per barrel, while Brent settled at $82.60, up 0.83% on the day. Gold gained ground but lost some shine in the wake of the Fed's policy statement and updated economic projections.

Spot gold added 0.3% to $2,322.60 an ounce.