US stocks rally, dollar falls after Fed decision

NEW YORK, United States — Wall Street stocks rallied and the dollar retreated Wednesday after the Federal Reserve enacted a smaller interest rate hike while acknowledging progress in the fight against inflation.

The US central bank announced a quarter-point increase to the benchmark lending rate, taking the rate to a target range of 4.50-4.75 percent and opting for a more traditional hike after a series of larger increases.

Fed Chair Jerome Powell said the central bank will need "substantially more evidence" to be confident that inflation is on a sustained downward path as the central bank signaled more hikes would be needed.

But analysts noted that the Fed's policy statement acknowledged progress in battling inflation, adding that Powell in his press conference avoided criticizing recent movements in financial markets that anticipate a more dovish posture by the US central bank.

"Powell was expected to adopt a confrontational tone today. He was supposed to scold traders for allowing financial conditions to reflect fewer fed funds hikes and easing later this year," said a note from FHN Financial's Chris Low.

"Powell said that while the Fed has a different forecast than the one implied by markets, he is not bothered by the divergence."

Stocks were in the red prior to the Fed's announcement following a mixed session in Europe. But equities moved higher soon after the 1900 GMT press release, rallying further during Powell's press conference.

The S&P 500 finished up 1.1 percent, while the dollar retreated against the euro and other currencies, with analysts saying Powell's press conference was seen as "more dovish than anticipated," as Matt Weller of Forex.com put it.

Foreign exchange markets will have more big announcements to digest Thursday when interest rate decisions by the European Central Bank and Bank of England are unveiled.

Ahead of the European announcements, data Wednesday showed the eurozone’s annual inflation rate slowing further.

Consumer prices in January eased to 8.5 percent, down from 9.2 percent in December, helped by a continued slowdown in the pace of energy cost rises.

January's inflation rate was much lower than the forecast of nine percent by financial data firm FactSet. But economists warned against taking the data at face value.

"January's bigger-than-expected decline in headline euro-zone inflation should be taken with a big pinch of salt" because Germany's data were estimates only and "therefore likely to be unreliable," Jack Allen-Reynolds, senior Europe economist at Capital Economics, said in a note.

Elsewhere, oil prices fell sharply following a weekly US inventory report that showed increases in both crude and gasoline supplies.