Stocks soared on Tuesday after an inflation reading raised hopes that the Federal Reserve’s campaign to curb inflation has reached its limits.
The S&P 500 rose 1.9 percent on Tuesday, while the Russell 2000 index of smaller company stocks, which are more exposed to the ups and downs of the economy, rose about 5 percent.
Stock gains reflected expectations that the Fed may not need to raise interest rates again after new data showed consumer price inflation slowed in October. The central bank has been raising borrowing costs since March last year in a bid to curb economic activity and slow the pace of price increases.
The figures came amid some debate in markets about whether the Federal Reserve will have to continue that campaign, particularly amid signs of a still healthy labor market and other factors that could inhibit policymakers’ efforts to moderate the inflation. But Tuesday’s report helped cement the view in financial markets that the Federal Reserve’s efforts are working.
The government reported that the overall consumer price index slowed to 3.2 percent last month on a year-over-year basis, down from September’s 3.7 percent reading and the lowest since July.
In the bond market, the two-year Treasury yield, which is sensitive to changes in investors’ expectations about interest rates, fell nearly 0.2 percentage point on Tuesday to around 4.85. percent, a huge move for an asset that typically rises and falls by hundredths of a percentage point.
In addition to reducing any chance that the Federal Reserve will surprise markets and still raise rates at its next meeting in December, investors have also begun betting on when the Fed will begin cutting interest rates. Jerome H. Powell, chairman of the Federal Reserve, recently said that central bank officials were not even considering that decision as they sought to keep the brakes on the economy until inflation fell further toward its target of just 2 percent. hundred.
“This takes a December rate hike off the table and reinforces our view that July was the last hike of the cycle, and the process will now shift to the Fed trying to delay cuts for as long as possible,” said analysts at BMO Capital. Markets. .