Stocks Jump As Investors Prepare For Bigger Fed Rate Hikes To Fight Inflation

Topline

The stock market finished slightly higher and government bond yields surged on Tuesday as investors assessed the Federal Reserve’s more aggressive stance on fighting inflation, with a growing number of Wall Street experts now forecasting the central bank to raise rates by a bigger-than-expected 0.50% at its next couple of meetings.

Key Facts

Stocks bounced back after a losing session on Monday: The Dow Jones Industrial Average rose 0.7%, over 250 points, while the S&P 500 gained 1.1% and the tech-heavy Nasdaq Composite nearly 2%.

Markets rallied after recent comments from Federal Reserve Chair Jerome Powell, who reiterated on Monday that inflation is “much too high” and that the central bank will take “necessary steps”—including more aggressive rate hikes—to bring consumer prices back down.

Powell’s comments allow for the possibility of a bigger-than-expected half-percentage-point rate hike at the central bank’s next meeting, less than a week after the Fed raised rates for the first time since 2018.

An increasing number of Wall Street experts now see bigger rate hikes ahead: Goldman Sachs forecast a 0.50% increase at both the upcoming May and June meetings, while UBS chief economist Jonathan Pingle said in a note that the “odds of a 50 bp rate hike are rising.”

Government bond yields also moved sharply higher, with the rate on the benchmark ten-year U.S. Treasury rising to a high of more than 2.35% on Tuesday, its highest level since 2019.

Oil prices, which have swung wildly in recent weeks, moved slightly higher amid the continued heavy fighting in Ukraine: The price of U.S. benchmark West Texas Intermediate now stands at $112 per barrel, while international benchmark Brent crude trades at around $116 per barrel.

Crucial Quote:

Stocks have had an “uninspiring start” to the week after Fed Chair Powell delivered another round of hawkish comments and as commodity prices surged again, says Edward Moya, senior market analyst for Oanda. Markets could easily see a “a couple supersize rate hikes by the summer,” he predicts, as “the harsh reality of faster rate rises is setting in for some traders and that could eventually lead to a taper tantrum, which might happen alongside stagflation.”

Key Background:

Stocks are still on track for a positive month, despite ongoing market volatility from the Federal Reserve’s rate-hiking campaign as well as Russia’s invasion of Ukraine. The Nasdaq is up more than 2% in March, while the Dow and S&P 500 have each risen nearly 4%. Markets have largely rallied since last week, when the Federal Reserve raised interest rates by 0.25%—the first increase since 2018—and predicted six more hikes this year.

Further Reading:

History Shows Investors Who Buy During Bear Markets Will Likely See Huge Gains (Forbes)

Dow Gains Nearly 300 Points As Stocks Wrap Up Best Week Since November 2020 (Forbes)

Federal Reserve’s Long-Awaited Rate Hike Is Here: Powell Announces 0.25% Increase (Forbes)

Fed Official Suggests Central Bank Is Fueling Inflation By Not Raising Rates ‘Aggressively’ (Forbes)

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