U.S. stocks erased earlier losses and jumped higher Wednesday after the Federal Reserve said it sees no interest rate hikes through 2023 and that it will let inflation run hotter than usual to ensure a full economic recovery.
The Dow Jones Industrial Average gained 210 points. The S&P 500 rose 0.5%. The Nasdaq Composite wiped out losses to traded 0.8% higher. The tech-heavy benchmark fell 1.5% earlier in the session as growth stocks got hit by surging bond yields again.
While the Fed expects benchmark interest rates to remain near zero for the next two years, the central bank upgraded their economic outlook to reflect expectations for a stronger recovery from the pandemic-triggered recession. Gross domestic product is expected to grow 6.5% in 2021 before cooling off in later years.
Expectations for core inflation also moved higher, with the committee now looking for a 2.2% gain this year as measured by personal consumption expenditures. The central bank’s stated goal is to keep inflation at 2% over the long run.
“It sounds like the perfect scenario for investors and the outlook and you’re seeing market response to this very optimistic view,” said Michael Arone, chief investment strategist at State Street Global Advisors. “Monetary policy is going to remain largely accommodative almost regardless of what happens with interest rates, inflation and asset prices.”
Fed Chair Jerome Powell said in a press conference that the Fed would need to see a material and sustained move in inflation above 2% before considering changes to its current easy policy stance.
“We do expect that we’ll begin to make faster progress on both labor markets and inflation as the year goes on because of the progress with the vaccines, because of the fiscal support that we’re getting,” Powell said. “We expect that to happen, but we’ll have to see it first.”
The 10-year Treasury yield came off its high of the day following the central bank’s update, rising 2 basis points to 1.64%. Earlier in the session, the benchmark rate jumped to 1.689%, hitting a level unseen since late January 2020. Higher rates have been hurting growth-oriented companies particularly hard as they erode the value of future cash flows.
“With the 2023 median plot still hugging the floor, stocks and bonds are rising again,” said Anu Gaggar, senior global investment analyst at Commonwealth Financial Network. “This is like a Goldilocks market – strong economic growth, moderately higher inflation, rebounding earnings, and very easy monetary conditions.”
Rising interest rates have been an overhang for stocks in recent weeks, specifically the tech sector. The jump in yields has forced a shift into value stocks from growth, pushing the Dow Jones Industrial Average and S&P 500 to hover near record highs.
Shares of Disney erased earlier losses and gained 0.8% after CEO Bob Chapek told CNBC that California’s two Disneyland theme parks will reopen on April 30.
McDonald’s climbed 2% after Deutsche Bank upgraded the stock to buy from hold.
—CNBC’s Patti Domm, Jeff Cox and Tom Franck contributed to this report.
