Wall Street swings after Fed keeps interest rates high, downplays odds of a hike

NEW YORK —  U.S. stocks swung to a mixed finish Wednesday after the head of the Federal Reserve said the cuts to interest rates that Wall Street craves so much are still likely, even if they’re delayed because of stubbornly high inflation.

The Standard & Poor’s 500 fell 17.30 points, or 0.3%, to 5,018.39 after the Fed held its main interest rate at its highest level since 2001, just as markets expected. The index had rallied as much as 1.2% in the afternoon before giving up all the gains at the end of trading.

The Dow Jones industrial average rose 87.37 points, or 0.2%, to 37,903.29, and the Nasdaq composite lost 52.34 points, or 0.3%, to close at 15,605.48.

On the downside for financial markets, Fed Chair Jerome H. Powell said out loud the fear that’s recently sent stock prices lower and erased traders’ hopes for imminent cuts to interest rates: “In recent months, inflation has shown a lack of further progress toward our 2% objective.” He also said that it probably will take “longer than previously expected” to get confident enough to cut rates, a move that would ease pressure on the economy and investment prices.

At the same time, though, Powell calmed a fear swirling in the market that inflation has remained so high that additional hikes to rates may be necessary.

“I think it’s unlikely that the next policy rate move will be a hike,” he said.

The Fed also offered financial markets some assistance by saying it would slow the pace of how much it’s shrinking its holdings of Treasurys. Such a move could grease the trading wheels in the financial system, offering stability in the bond market. Powell said the Fed did it to reduce the “risk of money markets showing stress.”

Yields eased in the bond market after the move and Powell’s comments.

The yield on the 10-year Treasury fell to 4.63% from 4.65% just before the announcement, easing the pressure on the stock market. The yield on the two-year Treasury yield, which more closely tracks expectations for the Fed, dropped to 4.95% from 5.04% late Tuesday.

Traders themselves had already downshifted their expectations for rate cuts this year to one or two, if any, after coming into the year forecasting six or more. That’s because they saw the same string of reports as the Fed, which showed inflation remaining stubbornly higher than forecast this year.

Powell had recently hinted that rates may stay high for a while. That was a disappointment for Wall Street after the Fed earlier had indicated it was penciling in three cuts to rates during 2024.

Powell’s comments Wednesday were largely seen as less harsh than feared.

“Yet, before markets get overly excited, it’s worth remembering that the Fed is responding to the unfolding economic data, just as we all are,” said Seema Shah, chief global strategist at Principal Asset Management. “The next few months of data are pivotal for the Fed path.”

Without the benefit of easing rates, companies will need to deliver better profits to support their stock prices.

CVS Health tumbled 16.8% after reporting weaker results for the latest quarter than analysts expected. It said it’s been hurt by increased costs at its Medicare Advantage business, and it cut its forecast for profit over the full year.

Starbucks dropped 15.9% after falling short of expectations for both profit and revenue in the latest quarter. Sales trends weakened at its stores outside the United States in particular, and it cut its full-year forecasts for profit and revenue.

Super Micro Computer, which has been one of Wall Street’s hottest stars, fell 14% despite topping expectations for profit. The company, which sells server and storage systems used in artificial intelligence and other computing, fell shy of analysts’ forecasts for revenue. Expectations had built up after its stock had tripled this year amid a broad frenzy on Wall Street around artificial intelligence technology.

Advanced Micro Devices dropped 8.9% despite reporting profit that matched expectations. Its revenue came in a bit shy of forecasts, as did the midpoint of its forecast range for revenue in the current quarter.

On the winning side was Amazon, which climbed 2.3% after reporting stronger profit for the latest quarter than analysts expected. The retail behemoth credited reaccelerating growth at its cloud-computing business, in part, as it benefits from demand for AI.

Before the Fed’s announcement, stocks and Treasury yields had been moving relatively little after some weaker-than-expected reports on the economy.

One report from the Institute for Supply Management said the U.S. manufacturing sector unexpectedly contracted last month.

A separate report said U.S. employers were advertising slightly fewer jobs at the end of March than economists expected. The hope on Wall Street has been that a cooldown could help prevent upward pressure on inflation. The downside is that if it weakens too much, a major support for the economy could give out.

Some recent economic reports raised fears about the potential for a stagnating economy combined with high inflation. The Fed doesn’t have great tools to fix such a scenario, called “stagflation.”

But Powell downplayed the risk of that and said inflation is much lower and economic growth is better than the last time stagflation struck in the 1970s and 80s.

“I don’t see the ‘stag’ or the ‘flation,’” he said.

Choe writes for the Associated Press