The dollar fell, and global stocks rallied on Wednesday after the US Federal Reserve raised interest rates by 75 basis points for the first time in more than 20 years, which cheered investors.
The Fed's decision to raise interest rates was widely expected, and it provided investors with a sense of relief that it could finally act aggressively to contain rising inflation. The Fed also signaled that the economy would slow down in the coming years.
However, stocks initially fell after the Fed released its minutes, which showed that it was more concerned about the economy's potential to get into a recession.
After the markets closed, investors started to focus on the positive aspects of the Fed's decision to raise interest rates. They believed that the economy would be better off if the central bank succeeded in controlling inflation.
Reflected buoyancy in global stock markets
The Dow Jones Industrial Average rose by 1%, the S&P 500 rose 1.46%, and the Nasdaq Composite gained more than 2%.
The substantial gains in global stocks were also reflected in the S&P 500's and the Dow's performance. The global equity index had hit its lowest level two years earlier this week.
Rick Rieder, the head of Blackrock's global fixed income team, said that the Fed's move to raise interest rates was a good sign for the economy and markets.
"Today's move by the Fed to progress faster to neutral will be applauded in the long run by the economy, business decision-makers and ultimately by markets," said Rieder.
The market's relief that the Fed delivered what it expected sent the yield on the 10-year Treasury note down to 3.291%, from an 11-year high of 3.498% on Tuesday. The yield on the two-year note also fell to 3.206%, from 3.456%.
The economy can take tighter policy
Following the rate rise, Jerome Powell, the Fed's chairman, said that the central bank was likely to raise interest rates at its next meeting in July. He noted that the economy was strong enough to handle the additional tightening.
Economist Ellen Hazen of F.L.Putnam Investment Management said the economy could still get into a recession. Hazen noted that it was important for the Fed to continue raising interest rates to prevent the country from falling into a recession.
Hazen continued by saying that the Fed's decision to raise interest rates had narrowed the runway for the economy to a soft landing. She said that it now looks like the central bank is expecting higher inflation and a higher unemployment rate.
European stocks rallied first
The concerns about rising interest rates and global inflation have been the main factors that have affected the financial markets this year. The fear that the Fed could tip the global economy into a recession had been a significant factor that has affected the markets.
However, before the Fed meeting, stocks and bonds rallied on Wednesday after the European Central Bank unveiled a new strategy to avoid a debt crisis. The central bank said it would support high-risk member states and develop a new tool to manage the risks associated with its debt.
Christine Lagarde, the head of the European Central Bank, tried to downplay the expectations of markets about the bank's role in addressing the debt crisis. Lagarde noted that the central bank's main objective was to keep inflation low.
At a forum in London, Lagarde reiterated the bank's commitment to maintaining the fiscal discipline of its member states. She noted that neither the bank nor its members could cede to fiscal dominance by the U.S.