Stocks Close Sharply Higher As Fed Raises Interest Rates

The S&P 500 rose 95.41 points, or 2.2%, to 4357.86. The broad stock-market gauge has risen 4.4% over the past two trading days, the biggest two-day percentage gain since April 2020. The tech-focused Nasdaq Composite advanced 487.93 points, or 3.8%, to 13436.55, its best day since November 2020. The Dow Jones Industrial Average rose 518.76 points, or 1.5%, to 34063.10.

The Fed raised interest rates by a quarter-percentage-point and new projections show that most officials expect the fed-funds rate to rise to at least 1.875% by the end of the year and to around 2.75% by the end of 2023. That implies a total of seven quarter-percentage-point increases this year and more next year.

The Fed’s interest rate increase on Wednesday marks the end of a historic wave of stimulus enacted while the Covid-19 pandemic was first spreading through the U.S. The pandemic put a halt to a yearslong bull market in stocks and tipped the economy into a recession. The stimulus helped the economy bounce back faster than many had expected and drive the stock market to new heights. Now, investors are faced with a different challenge: inflation that’s at a 40-year high. Some are even worried about a looming recession.

“It seems very much like they wanted to send a message that they’re fighting inflation and they’re going to fight it fast and get it under control,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.

The prospect of the Fed interest rate increases have roiled markets for months, though investors appeared to take the announcement in stride. The Nasdaq Composite is now on track for its longest bear market since the financial crisis. The S&P 500 is down about 9% from its high.

The central bank is navigating an unusually complicated environment of a tight labor market, supply disruptions, spiraling inflation, Russia’s invasion of Ukraine and Covid-19 lockdowns in China—the latter two of which are likely to compound inflationary and supply-chain issues. 

Bond yields rose after the announcement. The yield on the benchmark 10-year Treasury note climbed to 2.185%, the highest level since May 2019. Yields and prices move inversely. The sharp climb in bond yields reflects investors’ growing bets that Russia’s invasion of Ukraine won’t slow the momentum toward higher interest rates. 

U.S. retail-sales data for February showed increased spending from the month prior as households adapt to the crosscurrents of a strong labor market, falling coronavirus cases and inflation running at the highest annual rate in 40 years.

Shares of tech and growth companies, which had been battered in recent months, fared particularly well in trading Wednesday, a move that puzzled some traders. Tech and growth stocks have been the most sensitive to the path of interest rate increases, and some traders said they interpreted Mr. Powell’s stance on monetary policy as more aggressive than they had initially anticipated.

Some investors had aggressively dumped these positions since the start of the year while bond yields had risen, potentially setting the sector up for a reversal, some traders said.

“I thought it was a little bit more hawkish than anticipated,” said R.J. Grant, director of equity trading at KBW, of the Fed’s announcement and press conference. But, he said positioning “was kind of flushed out into the Fed decision.”

The S&P 500’s tech sector was one of the best performing, gaining 3.3%. Shares of the

ARK Innovation ETF

soared $5.65, or 10%, to $60.04.

Nvidia

shares jumped $15.23, or 6.6%, to $244.96.

PayPal

added $7.46, or 7.4%, to $107.92.

In the commodities market, oil prices have fallen below $100 a barrel in recent days, helping the stock market rebound. Moves in oil were muted Wednesday as investors weighed whether lockdowns in some Chinese cities will sap demand for energy even as Russia’s invasion of Ukraine has bolstered concerns of supply disruptions. Brent-crude futures, the international benchmark, edged down 1.9% to $98.02 a barrel, the third consecutive day of losses.

Elevated oil prices have prompted concerns that the U.S. and Europe could see sustained inflation and lower economic growth, as higher gas and energy prices eat away at household spending on other goods and services. 

The rally in technology shares wasn’t limited to the U.S. Technology stocks led a blistering rebound in Chinese markets after supportive comments from Beijing policy makers. Hong Kong’s Hang Seng Index soared 9.1%, led by gains in technology stocks. China’s Shanghai Composite climbed 3.5%. 

Chinese officials said they would “coordinate pandemic prevention and control and economic development, keep the economy operating within a reasonable range and keep the capital market running smoothly,” according to a report on Wednesday by Xinhua, China’s state news agency. This helped soothe some fears over an economic slowdown in China that would also sap growth globally. 

The KraneShares CSI China Internet ETF soared 40% after falling to a record low earlier in the week, recording its biggest one-day gain since it started trading in 2013.

“The bounceback in Chinese equities shows you how sensitive the markets are,” said

Peter Garnry,

head of equity strategy at Saxo Bank, noting wide swings in markets in recent weeks as investors watch headlines on a number of events. 

Overseas, the pan-continental Stoxx Europe 600 climbed 3.1%, led by a jump in its technology sector. Russia’s stock market remains closed through the rest of the week.

—Joe Wallace contributed to this article.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com