U.S. stocks climbed Wednesday following a surprisingly encouraging update on inflation and a reassurance that the Federal Reserve still sees a cut to interest rates as likely this year.
The S&P 500 added 0.9% to its all-time high set a day earlier. The Nasdaq composite also built on its own record and jumped 1.5%, while the Dow Jones Industrial Average lagged the market with a dip of 35 points, or 0.1%.
The action was even stronger in the bond market, where Treasury yields dropped after the inflation report showed U.S. consumers paid prices that were 3.3% higher for food, insurance and everything else last month from a year earlier. Economists had been expecting to see the inflation rate stuck at 3.4%.
For Wall Street, a slowdown in inflation not only helps U.S. households struggling to keep up with fast-rising prices, it also opens the door for the Federal Reserve to cut its main interest rate. Such a move would ease pressure on the economy and give a boost to investment prices.
Everything from bitcoin to gold to copper rallied after the inflation data raised expectations for coming cuts to interest rates. A measure of nervousness among investors in U.S. stocks also eased.
For its part, the Federal Reserve kept its main interest rate steady on Wednesday following its latest policy meeting.
Policymakers welcomed the latest update on inflation, but “we’ll need to see more good data to bolster our confidence,” Fed Chair Jerome Powell said. He repeated the Fed’s mantra that it needs an accumulation of data showing inflation is sustainably heading toward its 2% target before it lowers the federal funds rate, which is at the highest level in more than two decades.
“We’ll have to see where the data lights the way,” he said, reiterating the Fed’s commitment to moving based on where incoming reports steer it.
The Fed is in a tight spot with a lot on the line. Cutting interest rates too soon or by too much could allow inflation to reaccelerate, while waiting too long would put unnecessary pain on the economy.
“It’s a consequential decision for the economy, and you want to get it right,” Powell said.
The Fed indicated Wednesday that most of its policymakers are forecasting one or two cuts to interest rates at some point this year. They also raised their forecasts for the number of cuts in 2025.
Fed officials trimmed their forecast for the number of cuts in 2024 down from a median of three after progress seemed to stall early this year on bringing inflation lower. Such a fall-off was widely expected, and traders are still largely betting on the first of potentially two cuts to rates in 2024 coming in September, according to data from CME Group.