Stocks Rally, Dollar Slumps as Dovish Powell Triggers Bulls

A gauge of global stocks rallied and the U.S. dollar slumped on Wednesday after the Federal Reserve raised its target interest rate by the expected 25 basis points but comments from Chair Jerome Powell were interpreted as dovish by the market.

The Federal Reserve said on Wednesday it had turned a key corner in the fight against high inflation, but that “victory” would still require its benchmark overnight interest rate to be increased further and remain elevated at least through 2023.

In announcing its latest policy decision, the U.S. central bank scaled back to a quarter-percentage-point rate increase after a year of larger hikes and swept aside in its statement the long list of reasons, from war to the pandemic, that were driving prices higher to say simply that “inflation has eased.”

Yet policymakers also projected “ongoing increases” in borrowing costs would be needed, a still open-ended commitment that did not yet pinpoint when the rate hikes might stop, and pushed back against an expectation in financial markets that the Fed would pause soon and, indeed, cut rates later this year.

Investors nevertheless took a dovish cue from remarks by Fed Chair Jerome Powell, who referred repeatedly during a news conference to the “disinflationary” process that now appeared to be underway. Equity markets rose as Powell spoke and investors slightly boosted bets for coming rate cuts.

From a peak of nearly 7% in June, the Fed’s preferred measure of inflation was 5% in December, still well above its 2% target but heading steadily in the right direction.

Yet “it’s just the early stages,” Powell said. “We’re going to be cautious about declaring victory and … sending signals that we think that the game is won, because we’ve got a long way to go.”

Stocks, modestly lower ahead of the Fed rate decision, turned sharply higher as Powell spoke. The benchmark S&P 500 (.SPX) index ended the day with just over a 1% gain.

At the same time, the yield on the 2-year Treasury note , the maturity most sensitive to Fed policy expectations, dropped abruptly and traded down more than 10 basis points at 4.10%. The U.S. dollar slid against a basket of major trading partner currencies.

“If you were hoping for clear signs of an upcoming pause in interest rate hikes, you were left wanting. The Federal Reserve retained the phrase ‘ongoing increases’ in their statement, leaving their options open depending on what upcoming economic data says,” said Greg McBride, chief financial analyst at Bankrate.