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US stocks and government bonds rallied after Federal Reserve chair Jay Powell appeared to rule out raising rates by 0.75 percentage points at one of its forthcoming meetings.

The US central bank on Wednesday announced its first 0.5 percentage point interest rate rise in more than 20 years, but the move was widely expected and investors instead focused on Powell’s comments at a subsequent press conference.

Powell signalled that the Fed’s policymaking committee expected to implement 0.5 percentage point increases at its next two meetings, but was not “actively considering” a more aggressive 0.75 percentage point increase. He added, however, that the “if higher rates are required, then we won’t hesitate to deliver them”.

The yield on the two-year Treasury note, which is particularly sensitive to central bank policy, dropped 0.13 percentage points after the press conference, to 2.64 per cent. Yields fall when prices rise.

The yield on the benchmark 10-year Treasury dipped 0.04 percentage points, to 2.92 per cent, having climbed in the run-up to the announcement.

Wall Street’s benchmark S&P 500 closed 3 per cent higher, its largest one-day gain since May 2020. The Nasdaq Composite, which was in negative territory shortly before the press conference started, ended up 3.2 per cent.

Michael de Pass, head of linear rates at Citadel Securities, said the response reflected the fact that investors had priced in most of the Fed’s plans.

“It was still hawkish overall, but there was a fair amount priced in . . . it’s not as if Powell did a complete 180, but the most hawkish scenario has been taken off the table for now — they’ve said ‘it will be 50 basis points for the next two meetings, and then we’ll reassess’.”

The annual pace of consumer price inflation in the US hit 8.5 per cent in March, as energy and food costs surged in response to Russia’s invasion of Ukraine. Eurozone inflation is running at a record high of 7.5 per cent.

The Fed announcement is the centrepiece of a busy week of central bank updates around the world. Government bond markets elsewhere were under pressure on Wednesday.

Australia’s 10-year bond yield rose more than 0.2 percentage points to a high of 3.57 per cent on Wednesday, after the nation’s central bank on Tuesday lifted its main interest rate by a larger than expected 0.25 percentage points — its first such move in more than a decade.

“Australia started the gun on a week where we have more important central bank meetings,” said Brooks Macdonald’s chief investment officer Edward Park. “It was a firm reminder that bond markets can be caught off guard.” 

Germany’s 10-year Bund yield touched almost 1.04 per cent, later settling back to just under 1 per cent, after European Central Bank policymaker Isabel Schnabel told German publication Handelsblatt that a July rate rise was “possible”. 

Meanwhile, the yield on the 10-year Indian bond raced 0.26 percentage points higher to 7.4 per cent. The Reserve Bank of India on Wednesday announced a surprise 0.4 percentage point rate rise, the first increase in nearly four years.

Traders also expect the Bank of England to raise rates on Thursday.

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