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Fed raises interest rates by .5%. US stock market… rallies?

Written By | May 4, 2022
Fed raises interest rates, US stock market rallies

The Fed raised interest rates. Big Time. So the US stock market took off like a rocket? Image via (See artist link following article.)

WASHINGTON – With Bidenflation rampant and with interest rates on a quick trip up… WAY up… investors began May more or less the way they ended April. By dumping everything. They do that every time the Fed raises interest rates, or even when the Fed threatens to raise interest rates. But Wednesday at 2:00 p.m., the Federal Reserve announced its generally anticipated yet still-shocking decision to raise interest rates by a whopping 0.5% this month. Big trouble for investors, right? Wrong!  Wednesday morning’s nearly-flat US stock market averages decided to rally. Back to buying on the bad news, are we?

So what’s that old cliché? “It’s always darkest before the dawn?” Well, when it comes to investing in the US stock market these days, it still looked pretty dark this week. In fact, it looked particularly after the terrible month of April and the not-so-merry days of early May. In truth, everyone on the planet has been expecting — and fearing — a big Fed rate hike this month. And crashing stocks and market averages in advance of expectations.

So why today’s rally? (With the usual caveat, of course, that Mr. Market could take it all away by Wednesday’s 4:00 p.m. closing bell.)

When the Fed raises interest rates by a whopping 0.05% all at once, why the big US stock market rally?

I think the answer is fairly simple. With every investor and his (or her) brother puking stocks for the better part of the first, and now the second calendar quarter, even once-overpriced stocks (most of them) started to look oversold. So now, maybe we can enjoy a little bargain hunting. No one really knows the answer, of course. Including those CNBC special guests who always happily talk their own books, hoping, actually, that we’ll buy what they’re actually selling.

But what the heck? Let’s enjoy this afternoon’s surprisingly robust rally, even if Mr Market takes his punchbowl away roughly 10 minutes from the closing bell. Which he’s enjoyed doing many times in 2022.

But back to the likely reasoning behind today’s apparently Wrong Way Corrigan US stock market action.

At least as reported via CNBC.

“The Federal Reserve on Wednesday raised its benchmark interest rate by half a percentage point as the most aggressive step yet in its battle against generational highs in inflation.

“Along with the move higher in rates, the central bank indicated it will begin reducing asset holdings on its $9 trillion balance sheet. The Fed had been buying bonds to keep interest rates low and money flowing through the economy, but the surge in prices has necessitated a dramatic rethink in monetary policy.

“The plan outlined Wednesday will see the balance sheet reduction happen in phases as the Fed will allow a capped level of proceeds from maturing bonds to roll off each month while reinvesting the rest. Starting June 1, the plan will see $30 billion of Treasurys and $17.5 billion on mortgage-backed securities roll off. After three months, the cap for Treasurys will increase to $60 billion and $35 billion for mortgages…

“Markets were prepared for both moves but nonetheless have been volatile throughout the year. Investors have relied on the Fed as an active partner in making sure markets function well, but the inflation surge has necessitated tightening.”

ZeroHedge gave us roughly the same executive summary, initially offering its news and insights in PowerPoint-style.

“The Fed hiked rates 50bps – as expected. That is the biggest rate-hike since the bursting of the Dot-Com bubble in May 2000.

“The Fed will ‘taper’ into its QT starting June 1st.

“The ‘highly attentive’ comment [the Fed Report added] about inflation risks signals a hawkish tone but overall this is not more hawkish than expected.”

The Twin Tylers did proceed, however, to provide a bit more color on the issues.

“Since the last FOMC meeting, the short-term interest-rate (STIR) market has adjusted dramatically more hawkish in its outlook for the rest of the year – now pricing-in 11 more rate-hikes (that includes the expectation of 2x 25bps hikes today). But at the same time, the expectations for subsequent easing from what will inevitably create a recession have barely budged…

“Markets have been extremely volatile in the weeks since The Fed meeting (amid endless hawkish jawboning) with the dollar surging almost 5% higher against its fiat peers while bond prices have collapsed. Gold and stocks have been equally pummeled since March 16th, but… stocks have been a bloodbath since the post-Fed meltup finished at the end of March)…”

What gives?

Mr Market may actually mean to tell us that the Fed may get ahead of its rate targets if they keep jacking interest rates skyward. That’s a definite possibility given that the nation’s central bank is finally, really really going to start pulling away its asset and bond-buying punchbowl in a big, then bigger way beginning June 1.

Meanwhile, let’s enjoy today’s rally while it lasts (and IF it lasts). BTW, 45 minutes from that Wednesday closing bell, the Dow Jones Industrials are up over 715 points for a 2.15% gain on the day. The nearly extinct, tech-heavy NASDAQ, treading on red ink earlier today, continues to rally just short of +300 point for a 2.36% gain. And even the broader-based and more widely representative S&P 500 average is up close to 95 points for a currently market-leading 2.3% gain. At least at the moment.

The Fed raises interest rates. Big time. And we rally?

We certainly haven’t seen this kind of broad-based advance for awhile.

As to whether it continues much longer, however, no one really knows. Including CNBC’s Royal Smart Guys.

We’ll revel in the fun while it lasts, but we’re not going to commit much cash right now. Like Lucy, Mr Market likes to pull the bull market “football” away, which often has investors ending up just like the hapless Charlie Brown.

I’ll add today’s closing numbers to this piece before 4:30 p.m. this afternoon, so come on back here if you’re curious.

Tomorrow, of course, will be another day. For now, enjoy.


At Wednesday’s 4 p.m. closing bell, the Dow rallied for a massive +932.93 points to close at 34,061.06, a +2.82% increase for the day. The broader-based S&P 500 average of the biggest American company stocks ended the day at 4300.36. That’s an even more impressive gain of +124 points (+3%) . And the long-beleaguered, tech-heavy NASDAQ finally woke up from its long-time swoon Wednesday afternoon to close at 12,964.86, amassing a colossal +401.10 points in the process. That’s an amazing 3.19% gain on the day.

No guarantees for tomorrow, of course. But long-suffering bulls sure had a lot of fun Wednesday afternoon, whatever the reason for this astonishing rally on essentially bad economic news.

Stay tuned. I’ve been in the biz, directly or indirectly, since 1979. And trust me… this was one of the weirdest US stock market trading days yet.

Headline image: Image by Julians Balins from Pixabay.

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Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17