Stocks hit summer highs as Fed sees progress on inflation

NEW YORK - Wall Street climbed Wednesday to its best level since the summer following the latest hike to interest rates by the Federal Reserve, which said it's finally seeing improvements in inflation.

The S&P 500 rallied back from an early 1% loss to rise 1% after Fed Chair Jerome Powell said the economy is on the path toward getting inflation lower. The Dow Jones Industrial Average erased a drop of 500 points to rise 6, while the Nasdaq composite jumped 2%.

As expected, the Fed raised its benchmark interest rate by 0.25 percentage points to its highest level since late 2007. It's the smallest such increase in the Fed's blizzard of rate hikes since March.

What's more important for markets is where interest rates are heading next.

Much of Wall Street is hoping that cooling inflation since the summertime means the Fed may raise rates just a bit more, before taking a pause and then possibly cutting rates toward the end of the year. Rate cuts can ease pressure on the economy and juice investment prices. The Fed's Powell did reiterate Wednesday that "ongoing increases" in interest rates will be needed to bring inflation down to the Fed's target level. And he said it was still way too early to declare victory over inflation.

But he also said, "We can now say, I think for the first time, that the disinflationary process has started." That got Wall Street thinking about a future with no more rate increases.

"He had the opportunity to use his voice to tamp down market expectations, and he didn't do it," said Katie Nixon, chief investment officer at Northern Trust Wealth Management. "Anyone that had taken a bet that the Fed was going to come out hard on financial positions lost that bet."

Higher interest rates try to snuff out inflation by slowing the economy and dragging on prices for stocks and other investments.

The Fed has already pulled its key overnight rate to its highest level since 2007, at a range of 4.50% to 4.75%, up from virtually zero early last year.

At stake is the economy, which many investors see likely heading down one of two paths: either a relatively short and shallow recession or a much deeper and more painful one.