US Markets

S&P 500 closes at a record as Fed signals no rate hikes until inflation rises 'significantly'

Stocks drop and bond yields rise after Fed cuts rates for third time since July
Stocks drop and bond yields rise after Fed cuts rates for third time since July

Stocks rose on Wednesday as investors cheered the Federal Reserve's third rate cut of the year and comments from Chairman Jerome Powell that signaled it would be a while before the central bank hikes rates.

The S&P 500 hit an all-time high, climbing 0.3% to 3,046.77. The Dow Jones Industrial Average closed 115.27 points higher, or 0.4% at 27,186.69. The Nasdaq Composite ended the day up 0.3% at 8,303.98.

Utilities and health care were the best-performing sectors in the S&P 500, rising 0.9% and 0.8%, respectively. General Electric was among the S&P 500's biggest advancers on the back of strong earnings. Johnson & Johnson outperformed all other Dow stocks, rising 2.9% after the company said it found no asbestos in its baby powder after testing.

Powell and the Fed struck just the right tone to satisfy equity investors by signalling it would pause rate cuts, but wouldn't think of hiking again until inflation moved higher.

"We have inflation expectations trending lower and inflation just hasn't been near 2% for most of the year," said Michael Reynolds, investment strategy officer at Glenmede. "If that's the bogie for raising rates at this point, the market is going to be very happy. It looks like we might sit pretty low for a while."

Stocks moved to their highs of the day after Powell said in a press conference after the decision that the central bank would need to see a "really significant" rise in inflation before the Fed thought about hiking.

The U.S. central bank lowered rates for the third time this year by 25 basis points. The central bank also removed a key phrase from its statement that said it will "act as appropriate" to sustain the current expansion.

"He's telling you they're done for now," said Gregory Faranello, head of U.S. rates trading at AmeriVet Securities. "Powell explicitly said it would take a 'material reassessment' to the Fed's outlook for them to keep cutting rates." Faranello noted Powell did leave the door open for further easing if needed, but added that Powell "had to raise the bar for further rate cuts."

The Fed's announcement came after the release of better-than-expected economic data earlier in the day.

The Commerce Department said U.S. GDP grew by 1.9% in the third quarter, topping expected growth of 1.6%. The better-than-expected print was driven by continued consumer spending along with government expenditures.

A trader wearing a 'Dow 20,000' hat works on the floor of the New York Stock Exchange (NYSE), December 13, 2016 in New York City.
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"Strength came from where we expected it, the consumer and weakness came from where we expected it, investment and trade," said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

U.S. private payrolls increased by 125,000 in October, according to ADP and Moody's Analytics. That topped a Dow Jones estimate of 100,000. However, September payrolls were trimmed down by 42,000 to 93,000.

The corporate earnings season also continued Wednesday with General Electric posting results that topped analyst expectations. GE also raised its forecast for 2019 cash flow, sending its stock up 11.5%.

CME Group and ADP also reported better-than-expected earnings. Apple, Facebook, Starbucks and Lyft are among the companies set to release their results after the bell.

So far, the corporate earnings season has been better than feared. Of the S&P 500 companies that have reported, 74% have posted better-than-expected earnings, according to FactSet data.

Wednesday's moves came after the S&P 500 touched an all-time high in the previous session. However, the broad index failed to close higher on Tuesday amid mixed quarterly results and trade news.

Reuters reported Tuesday, citing an unnamed U.S. administration official as saying an interim trade agreement between the U.S. and China might not be completed in time for signing in Chile next month. The news outlet also said Wednesday the Trump administration's demand that Beijing commit to buying more U.S. agricultural products has become a major sticking point in negotiations.

Washington and Beijing secured a limited trade deal earlier this month, in an attempt to end a protracted dispute that has battered financial markets and hammered global growth.

—CNBC's Sam Meredith contributed to this report.