Dow jumps 200 points after Powell signals Fed could stay aggressive to snuff out inflation

Stocks rallied after the Federal Reserve hiked rates by 75 basis points — its largest increase since 1994 — and signaled it could raise rates by a similar magnitude in July, giving investors confidence the central bank was committed to tamping down inflation.

The Dow Jones Industrial Average rose 270 points, or 0.9%. The S&P 500 traded 1.3% higher and the Nasdaq Composite jumped 2.2%.

Stocks were volatile after the rate hike decision to hike rates but jumped to session highs as Fed Chairman Jerome Powell said during his press conference that, "either a 50 basis point or a 75 basis point increase seems most likely at our next meeting."

The market had bet on a more than 95% chance of a 75 basis point rate hike, the biggest increase since 1994, according to the CME Group's FedWatch tool, but it was Powell's willingness to do another hike of that size that surprised markets.

"The more aggressive stance can still be consistent with a softish landing for the economy, but the path is getting narrower," wrote Barry Gilbert, asset allocation strategist for LPL Financial. "We still think the Fed may be able to back off from its new forecast of a 3.4% benchmark rate at the end of the year, but for now, the priority is showing resolve."

Tech shares, which have been beaten-up as the S&P 500 slipped into bear market territory, led the market's bounce with Amazon and Tesla each jumping more than 5%. The gains in technology boosted communication services and the consumer discretionary sectors by 2% each.

The larger-than-usual rate hike came amid headlines that Fed officials were contemplating such a move following a surprisingly hot inflation reading and worsening economic outlook. At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Market Committee said in a statement it was "strongly committed to returning inflation to its 2 percent objective."

The Fed's benchmark rate is now slated to end the year at 3.4%, based on the midpoint of the target range of individual members' expectations. 

Boeing, Microsoft and Goldman Sachs jumped 9.5%, 3.2% and 3%, respectively, bringing the Dow higher. Meanwhile, battered travel names staged a comeback with cruise stocks Carnival and Norwegian Cruise Line rising about 2.5% and 4.2%, respectively. Shares of airline stocks including Delta and United also rose about 2% each.

"The stronger the Fed can be with respect to raising rates, the greater the likelihood the market will rally," said Adam Sarhan, CEO of 50 Park Investment. "The market wants to see definitive action. The market wants certainty, the market wants clarity and the market wants to know that the Fed can regain control of the narrative."

Some notable investors, including Pershing Square's Bill Ackman, believe the central bank can regain credibility by acting aggressively to show its seriousness in combating inflation.

The Fed "raises 75 bps, expresses a high level of concern about inflation and inflationary expectations, and makes clear that nothing is off the table for July including 100 bps or more if necessary," he wrote in a tweet Wednesday as his "prediction" ahead of the Fed decision.

Treasury yields, which have jumped dramatically this week in anticipation of the big rate hike, pulled back on Wednesday. The 2-year rate, most sensitive to changes in monetary policy, surged 40 basis points this week alone to hit its highest level since 2007. The benchmark 10-year yield popped more than 30 basis points to top 3.48%, a high not seen since April 2011.

Meanwhile, some traders anticipate more pain ahead for the markets.

"We think risk assets will still have to correct lower and remain firmly risk-off in our tactical asset allocation," wrote HSBC Global Research's Max Kettner. "The very recent market obsession surrounding a 'bear market rally' now appears to be something of a fad," he added.

Wednesday's moves came after the S&P 500 suffered a five-day losing streak and dipped further into bear market territory on Tuesday. The index has already fallen more than 3% this week already and is now off nearly 22% from its all-time time hit in early January. The blue-chip Dow slid about 150 points Tuesday, also falling for a fifth straight day Tuesday. The Nasdaq Composite ended Tuesday slightly higher.

"While all eyes will be on the Fed this afternoon, we expect next phase of the current bear market to be driven by rising recession risks and a downward earnings revisions cycle," wrote Wolfe Research's Chris Senyek.