Fed pauses hikes, bond yields spike then cool as Wall Street digests new outlook

The Federal Reserve held its main interest rate steady on Wednesday, a move that triggered immediate volatility in the bond market while U.S. stock indexes posted modest gains.

The two-year Treasury yield, which closely tracks expectations for central bank policy, initially climbed above 4.79% from 4.70% late Tuesday. That initial jump followed a disclosure that two officials favored a rate increase, only to be outvoted by their peers. The yield quickly reversed course, dropping as low as 4.69% after Fed Chairman Kevin Warsh indicated the central bank wants to observe how conditions evolve before acting.

Warsh noted that loan rates have risen and lenders have become more discerning in their lending practices. He stated that the prevailing view among Fed officials is that monetary policy is starting to show results. He added that current economic developments align with the Fed's dual mandate of maintaining a healthy job market and keeping inflation relatively low. The central bank raised rates for the first time in three years last month to combat inflation that has remained above its 2% target for years.

Market participants adjusted their forecasts in response. Data from CME Group showed that traders still expect further rate increases by next summer but reduced the number of hikes they anticipate. The 10-year Treasury yield, which reflects long-term inflation and growth expectations, ended the day at 5.02%, up from 4.99% the previous session.

Oil prices also influenced market sentiment. Brent crude, the international benchmark, rose 2% to $111.64 per barrel as uncertainty persisted regarding the Middle East and the global energy sector. Higher borrowing costs generally pressure stock prices, forcing companies to demonstrate stronger profit growth to maintain investor confidence.

Corporate earnings provided mixed results for the broader market. GE HealthCare Technologies stock climbed 6.6% after beating summer profit and revenue targets and raising its full-year forecasts. Etsy shares jumped 5.4% following a strong profit quarter, with CEO Kruti Patel Goyal reporting that active buyers grew from prior-year levels for the first time in two years. In the technology sector, Micron Technology rose 5.9% and served as the primary driver for the S&P 500's gain, following a 10.9% surge by South Korean chipmaker SK Hynix in Seoul.

Wendy's stock jumped 15.1% after investor Nelson Peltz's Trian Fund Management announced an offer to buy the restaurant chain. This gain helped offset declines elsewhere, including a 5.8% drop in Boston Scientific shares due to a softer current-quarter profit forecast. Robinhood Markets fell 3.3% after reporting weaker quarterly results than expected. By the close, the S&P 500 gained 21.38 points to 7,743.98, the Dow Jones Industrial Average added 97.53 points to 52,475.10, and the Nasdaq composite climbed 72.04 points to 26,549.85.