NEW YORK: The S&P 500 and Nasdaq rallied on Wednesday (Feb 1) after the Federal Reserve (Fed) enacted a smaller interest rate increase, pointing to progress in its fight against inflation.

All three major indices finished higher, led by the tech-rich Nasdaq Composite Index.

The Dow Jones Industrial Average rose 6.92 points, or 0.02%, to 34,092.96, the S&P 500 gained 42.61 points, or 1.05%, to 4,119.21 and the Nasdaq Composite added 231.77 points, or 2%, to 11,816.32.

The afternoon rally had the S&P registering its highest closing level since Aug 25 while the Nasdaq posted its highest close since September.

The US central bank announced a quarter-point rise to the benchmark lending rate, taking the rate to a target range of 4.50-4.75% and opting for a more traditional hike after a series of larger increases.

Fed chair Jerome Powell said the central bank will need “substantially more evidence” to be confident that inflation is on a sustained downward path as the central bank signalled more increases would be needed.

But analysts noted that the Fed’s policy statement acknowledged progress in battling inflation, adding that Powell in his press conference avoided criticizsing recent movements in financial markets that anticipate a more dovish posture by the US central bank.

“Powell was expected to adopt a confrontational tone today. He was supposed to scold traders for allowing financial conditions to reflect fewer fed funds hikes and easing later this year,” said a note from FHN Financial’s Chris Low.

“Powell said that while the Fed has a different forecast than the one implied by markets, he is not bothered by the divergence.”

Art Hogan, an analyst at B. Riley Financial, contrasted Powell’s tone with the one he set last August during a speech in Jackson Hole, Wyoming, where he adopted a hawkish line on inflation after financial markets bet on an imminent pivot by the Fed.

On Wednesday, Powell led a “better than feared press conference that certainly acted as a tailwind for markets Hogan said.

Wall Street’s major indices had lost ground immediately after the Fed announced its rate increase decision. Its statement also said “ongoing increases” to rates would be appropriate.

But the indices bounced off their lows and kept gaining ground soon after Powell started speaking to reporters.

Investors were encouraged by Powell’s answer to a question about easing financial conditions such as rising equities and falling bond yields in recent months, according to Angelo Kourkafas, investment strategist at Edward Jones, St Louis.

“He had an opportunity to relay a hawkish message and didn’t take it. He could’ve said that markets are getting overly excited and he didn’t take the opportunity. Instead he said a lot of tightening has already happened,” said Kourkafas.

Since Powell said he could acknowledge for the first time that disinflation had started to happen, investors saw his suggestion that there could be two more rate increases as a “placeholder” the strategist said. – AFP, Reuters