NEW YORK (AP) — U.S. stocks were rising Wednesday after an unexpectedly upbeat update on inflation, and the Federal Reserve also reaffirmed that policymakers still see interest rate cuts that Wall Street is eager to see coming this year.
The S&P 500 rose 1% in afternoon trading, on track to surpass the all-time high it set the previous day. The Nasdaq Composite also hit a record high, up 1.9% as of 3 p.m. ET. The Dow Jones Industrial Average underperformed the market, trading roughly flat.
Movement was even fiercer in the bond market, where Treasury yields fell sharply after a report showed that U.S. consumers paid 3.3% more for food, insurance and all other goods last month than they did a year earlier. Economists had expected inflation to stay at 3.4%.
For Wall Street, slowing inflation would not only help American households struggling to keep up with soaring prices, it would also pave the way for the Federal Reserve to cut its key interest rate. Such a move would ease pressure on the economy and boost investment prices.
The inflation data spurred hopes of upcoming interest rate cuts, boosting the value of everything from bitcoin to gold and copper, while also easing fears among U.S. stock investors.
Meanwhile, the Federal Reserve left its key interest rate unchanged on Wednesday following its latest policy meeting.
Policymakers welcomed Wednesday’s inflation update but “we’ll need better data to bolster our confidence,” Fed Chairman Jerome Powell said. He reiterated the Fed’s belief that it needs to accumulate data showing inflation is progressing sustainably toward its 2 percent target before cutting the federal funds rate, which is at its highest in more than two decades.
“We’ll have to wait and see where the data points the way,” he said, reiterating the Fed’s stance that it will act based on the upcoming report.
The Fed is in a tough position with a lot at stake: Cutting rates too soon or too much could send inflation surging back up, while waiting too long could inflict unnecessary pain on the economy.
“This is a major decision for the economy and we want to get it right,” Powell said.
The Fed signaled on Wednesday that most policymakers still expect at least one rate cut this year, and it also raised its forecast for the number of cuts in 2025.
The Fed cut its forecast for the number of rate cuts this year from three after progress toward containing inflation appeared to stall earlier this year. Such a cut is widely expected, with traders still expecting the first of two possible cuts this year to come in September, according to CME Group data.
Sectors of the stock market that tend to benefit most from low interest rates performed best.
Smaller companies, which need to borrow to grow and have been hit harder by rising interest rates than larger companies, led the market. Small-cap stocks in the Russell 2000 index rose 2.2%.
Real estate stocks also rose. Lower interest rates mean less interest is paid on bonds, which could sway potential investors to dividend-paying property owners. Office owner Boston Properties Inc. rose 3.3%.
Lower interest rates could also lower mortgage rates, giving a boost to the housing market. Homebuilder D.R. Horton rose 3.6 percent.
Oracle rose 12.9%, leading Wall Street’s gains, despite reporting weaker-than-analysts-expected latest quarterly profit, which financial analysts cited as strong orders, including a contract related to artificial intelligence training.
The frenzy around AI has helped propel stocks to record highs despite concerns about high interest rates and the economic slowdown they will cause. Nvidia was again one of the strongest drivers of the S&P 500’s rise, climbing 3.7%. The chip company has become a symbol of the AI rush, and its market capitalization has topped $3 trillion.
The only company in the S&P 500 whose shares rose more than Nvidia was Apple, up 6.1%, whose shares have surged over the past two days after an announcement that its operating system would include several AI-related features was initially met with a tepid response.
In the bond market, the yield on the 10-year Treasury note fell to 4.29% from 4.40% late Monday and from 4.60% a few weeks ago. The yield on the two-year note, which is closer to the Fed’s expectations, fell sharply to 4.74% from 4.83% late Monday.
Overseas, European stock indexes surged after a strong U.S. inflation reading. Indices were mixed in Asia, where markets closed ahead of the data release. Japan’s Nikkei fell 0.7 percent as investors awaited the Bank of Japan’s latest interest rate announcement, scheduled for Friday.
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AP Business Writers Matt Ott and Elaine Kurtenbach contributed.
