Here’s Why Stocks Rallied After The Fed’s Massive Rate Hike

Here’s Why Stocks Rallied After The Fed’s Massive Rate Hike
Stéphane Renevier, CFA

almost 2 years ago1 min

In its biggest single increase since 2000, the Federal Reserve (the Fed) raised interest rates by half a percentage point yesterday. And while investors usually recoil at the sight of higher rates, they’d sent stocks up almost 3% by the end of the day – the biggest gain on the day of a Fed announcement in over a decade.

Now, the size of that rate hike wasn’t a surprise: investors had long been anticipating the bank to make such a determined move. If anything, they actually came into this update anxious that the Fed would, given inflationary pressures, have to hike rates higher or faster than planned, potentially even opting for a 0.75 percentage point hike. So when it opted to stick to the 0.5 percentage point uptick, it was cause for celebration.

As for how high stocks jumped, that’s probably down to the fact that investors have been feeling increasingly pessimistic recently, with high inflation and rising interest rates casting a shadow over the market. After all, when everyone’s expecting the worst, any hint of positive news can have an outsized impact.

Still, looking at things critically, nothing’s fundamentally changed: the Fed will still have to hike rates aggressively to fight off inflationary pressures, and higher rates will still be detrimental to both economic growth and stocks. So while the Fed may have helped alleviate some investor jitters, the outlook doesn’t seem much brighter than it was before…

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