Wall Street Shrugs Off 'Fed’s Tough Talk' to Cheer Smaller Hikes

Wall Street had widely expected that the Federal Reserve would ease up on its pace of rate hikes to battle inflation on Wednesday. But despite the central bank’s efforts to emphasize that it wasn’t going to stop hiking any time soon, markets rallied after traders decided that the finish line was in sight.

The unanimous decision to raise the benchmark rate target by 25 basis points followed a 50 basis-point hike in December where the same language — “ongoing increases in the target range will be appropriate” — had been used. In his news conference, Chair Jerome Powell tried to hammer home the point that policy would stay restrictive “for quite some time.”

But traders who had been looking for some sign that the Fed might take a breather took heart from Powell comments that this meant “a couple of more rate hikes.” US equity indexes, which had gyrated, took off once Powell began speaking. Treasury yields fell and swap contracts implied that the June peak in the Fed’s policy rate would remain below 5%.

“Markets seemed to be shrugging off the Fed’s tough talk, and celebrating that the rate hikes are smaller and the end is in site given that inflationary pressures seem to be abating,” said Jane Edmondson, co-founder of EQM Indexes. “Still room for a soft landing that avoids a recession. I think the fact that the job market and corporate earnings have survived all these rate hikes is a testimony to underlying strength of the economy.”