NEW YORK, June 16 ― Global stocks rallied and government bond yields and the dollar retreated from multi-year highs yesterday as investors cheered the Federal Reserve's decision to raise interest rates by three-fourths of a percentage point, the biggest increase since 1994.

Investors seemed relieved that the US central bank had met the market's expectations that it will act aggressively to tame surging inflation, and appeared for now to be comfortable with the Fed's projection that the economy is likely to slow in the next two years.

Minutes after the rate hike that was widely predicted by the market, stocks had initially pared gains as investors worried about the prospect of tighter monetary policy tipping the economy into a recession.

But by late afternoon in New York, investors had cast aside growth concerns, and instead took the view that the economy was better off in the long run if the Fed succeeded in reining in prices now.

The Dow Jones Industrial Average ended the session by jumping 1 per cent. The S&P 500 leapt 1.46 per cent, and the Nasdaq Composite climbed 2.5 per cent.

The buoyancy was reflected in global equities. MSCI's gauge of stocks across the globe also zoomed up 1.10 per cent, after hitting its lowest in about 1-1/2 years earlier this week.

“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 Rick Rieder, the chief investment officer of global fixed income and the head of the global allocation investment team at Blackrock.

The market's relief that the Fed had delivered what it expected extended to Treasuries.

The yield on benchmark 10-year Treasuries pulled back to 3.291 per cent, down from an 11-year peak of 3.498 per cent struck on Tuesday. The yield on two-year Treasuries also slipped to 3.2096 per cent, well under Tuesday's high 3.456 per cent, a level last seen in 2007.

At a news conference following the rate rise, Fed Chair Jerome Powell said that either a 50- or 75-basis-point rate increase at its next policy meeting in July seemed most likely, and that the economy is strong enough to handle tighter policy.

“Whether or not we can escape this without a recession is coming into question,” said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Massachusetts.

“The runway for them to have a soft landing just got shorter and narrower, meaning that they are anticipating higher inflation, they are anticipating higher unemployment, they are anticipating lower GDP (gross domestic product),” Hazen said.

ECB surprise

Worries about rising borrowing costs and global inflation have hammered financial markets all year.

World stocks are down over 20 per cent, bond markets have been routed and fears that drastic Fed action could tip the world into a recession means the Fed's moves later will be crucial for traders.

But global stocks and bonds had rallied yesterday before the Fed meeting, buoyed by a surprise announcement from the European Central Bank (ECB) that it will work to avoid a debt crisis due to rising borrowing costs by supporting high-debt member states, and devising a new tool to manage the risks.

Though some investors thought the ECB's proposed measures were not bold enough, European shares jumped, and government bond yields in countries such as Italy, Spain and Portugal ― which will benefit from the ECB's plans ― pulled back.

Italy's 10-year bond yield, which stands to benefit the most from the ECB's plans, was last down at 3.91 per cent, above its session low of 3.799 per cent. Spanish and Portuguese 10-year yields also came off their day's lows but were still sharply down on the day.

Given many US borrowing rates are linked to yields, financial conditions have already tightened markedly there even before the Fed hikes.

ECB chief Christine Lagarde tried to talk down expectations yesterday about how much the European central bank should do to avert a debt crisis, arguing that the ECB's job is to tame inflation, not help budgets.

“We cannot surrender to fiscal dominance,” Lagarde said at a forum in London. “Neither can we surrender to finance dominance; we have to deliver on our mandate.”

With yesterday's Fed rate rise already priced in by the market, the dollar index took a breather after charging to a 20-year high of 105.79 earlier in the day. By early evening, it was down 0.40 per cent. That helped the euro to trim initial losses to stand flat at US$1.04205 (RM4.59).

Gold, which has taken a hammering from inflation and a sky-high dollar, rose as a softer dollar and a pull-back in Treasury yields gave it some reprieve. It jumped as much as 1.4 per cent to US$1,830.31 an ounce in the wake of the US rate rise.

Oil was an outlier, and prices fell as investors worried that the Fed's aggressive tightening could dent demand.

Oil prices stumbled after the Organisation of the Petroleum Exporting Countries (Opec) stuck to its forecast that world oil demand will exceed pre-pandemic levels in 2022.

Brent crude futures for August settled down US$2.66, or 2.2 per cent, at US$118.51 a barrel, having fallen as low as US$117.75.

US West Texas Intermediate crude for July settled down US$3.62, or 3.04 per cent, at US$115.31 a barrel, after dropping to a low of US$114.60. ― Reuters