The Federal Reserve added 75 basis points to rates in its fourth increase of the year, with Chairman Jerome Powell strongly dismissing the notion of an impending slowdown after saying many sectors of US gross domestic product (GDP), especially the job market, were performing well. His vote of confidence in the economy opened the flood-gates for buying from equity investors who had shunned US stocks for months on fears of a recession.
Wall Street’s S&P 500 index, representing the top 500 US stocks, closed up 2.5% for its strongest showing in a week.
The Dow Jones Industrial Average, comprising stocks of 30 large US corporations, finished up 1.4%. Like the S&P 500, it was also the Dow’s biggest rally in a week.
But the outlier was the Nasdaq Composite Index, which comprises marquee technology names such as Amazon, Apple, Netflix and Google. The tech barometer closed up 4.1% on the day. Data from markets tracker Investing.com showed it to be the biggest one-day rally since a 4.3% jump on January 4, 2019.
"Now that traders see light at the end of the Fed tightening tunnel, the Nasdaq is starting to look like the cleanest dirty shirt in what looks like a 2023 recession-bound economy," said Ed Moya, analyst at online trading platform OANDA.
A rash of US macroeconomic data have shown signs of weakening lately, intensifying talk of recession.
Sales of new US homes fell just over 8% in June from a month ago and were down double-digits from a year earlier, according to government figures that reinforced the notion of a housing market weakening from surging mortgage rates and declining consumer confidence.
US consumer confidence, meanwhile, fell for a third month in a row in July.
With Wednesday’s rate hike, the Fed has brought rates to a range of between 2.25% and 2.5% from a zero to 0.25% in February. The central bank has the option of three more rate revisions before the year-end. Despite this year's increases, inflation measured by the Consumer Price Index expanded by 9.1% in the year to June, its highest in four decades. The central bank’s tolerance for inflation is a mere 2% per year.
Economists say the Fed risks pushing the economy into a recession if it continues with its present trajectory of rate hikes. US GDP already declined 1.6% in the first quarter. The Commerce Department will issue its first estimate for second quarter GDP on Thursday, with only a negative reading required to technically send the economy into a recession.