US stocks extended their rally on Wednesday in volatile trade and Treasury yields rose after the Federal Reserve raised interest rates by three-fourths of a percentage point, the biggest increase since 1994, as it sought to tamper surging inflation.
Investors seemed relieved that the U.S. central bank had met the market's expectations with the rate hike, and appeared for now to be comfortable with the Fed's projection that the economy is set to slow in the next two years.
By late on Friday, US shares had extended gains after an initial pullback following the rate announcement. The Dow Jones Industrial Average leaped 1.8%, the S&P 500 jumped 1.3%, and the Nasdaq Composite climbed 2.9%.
MSCI's gauge of stocks across the globe also leapt 1.13%.
The rand strengthened by almost 2% to R15.81/$.
Some investors said trading was choppy as the market was still trying to weigh the risks of surging prices versus a cooling economy, which is a likely outcome if inflation were brought under control.
“The market doesn’t know what it wants. It wants higher interest rates to stave off inflation, but it also realizes higher interest rates make the cost of doing business more expensive," said Jake Dollarhide, the chief executive officer at Longbow Asset Management in Tulsa, Oklahoma.
US Treasury yields also rose in volatile trade after the rate increase. The yield on benchmark 10-year Treasuries rose to 3.421%, and the yield on two-year Treasuries also climbed to 3.441%, but still under Tuesday's high 3.456%, a level last seen in 2007.
At a news conference following the rate rise, Fed Chair Jerome Powell said that either a 50- or 75-basis-point rate increase at its next policy meeting in July seemed most likely, and that the economy is strong enough to handle tighter policy.
"Whether or not we can escape this without a recession is coming into question," said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Massachusetts.
"The runway for them to have a soft landing just got shorter and narrower, meaning that they are anticipating higher inflation, they are anticipating higher unemployment, they are anticipating lower GDP," Hazen said.
Worries about rising borrowing costs and global inflation have been hammering financial markets all year.
World stocks are down over 20%, bond markets have been routed and fears that drastic Fed action could tip the world into a recession means the Fed's moves later will be crucial for traders.
But world stocks and bonds had rallied on Wednesday before the Fed meeting, buoyed by a surprise announcement from the European Central Bank (ECB) that it will work to avoid a debt crisis due to rising borrowing costs by supporting high-debt member states and devising a new tool to manage the risks.
Though some investors thought the ECB's proposed measures were not bold enough, European shares jumped, and government bond yields in countries such as Italy, Spain and Portugal - which will benefit from the ECB's plans - pulled back.
Given many U.S. borrowing rates are linked to yields, financial conditions have already tightened markedly there even before the Fed hikes.
With Wednesday's rate rise fully anticipated by the market, the dollar index gave up early gains after the Fed's move, and was down 0.11% in early afternoon. That helped the euro to trim initial losses to stand flat at $1.04205.
Italy's 10-year bond yield, which stands to benefit the most from the ECB's plans, was last down at 3.91%, above its session low of 3.799%. Spanish and Portuguese 10-year yields also came off their day's lows but were still sharply down on the day. .
"I think essentially it is the bare minimum of what could be expected, but I also believe it's the most realistic outcome of what they could compromise (on) today," Piet Christiansen, chief analyst at Danske Bank in Copenhagen, said of the ECB's announcement.
Still, the ECB's move allowed bond markets everywhere to rally after their recent hammering, with German Bund yields swooping down to 1.67% and 10-year Treasury yields dropping to 3.37% from Tuesday's peak of 3.498%.
Gold, which has taken a hammering from inflation and a sky-high dollar, also rose on the Fed's rate rise. It jumped 1.4% to $1,830.31 an ounce.
Oil prices stumbled after the Organization of the Petroleum Exporting Countries (OPEC) stuck to its forecast that world oil demand will exceed pre-pandemic levels in 2022.
Brent crude was more than $2 softer at $119.04, while U.S. crude also lost $3 to $118.93 per barrel.