Wall Street rises, yields fall in choppy trade as Fed keeps rates unchanged

Equities rose in a volatile session on Wednesday but US Treasury yields fell after the Federal Reserve left interest rates unchanged while warning of higher inflation and labor market risks.

While trading was choppy after the Fed statement and comments from its chair, Jerome Powell, stocks had a late-session rally as chipmakers jumped after Bloomberg reported that President Donald Trump's administration plans to rescind artificial-intelligence chip curbs made by the Biden administration.

This was after the Fed said it held rates steady, in line with expectations. But while the US central bank said the economy continued to expand at a solid pace, it noted that risks of higher inflation and unemployment had risen as it grapples with the impact of Trump's tariff policies.

The risks of higher unemployment and higher inflation left the Fed with almost no good short-term options, said Julia Hermann, global market strategist at New York Life Investments.

"Their ability to preemptively cut rates to shore up economic growth is constrained by upside inflation risks, and then, conversely, their ability to preemptively hike rates to reduce inflation risk is constrained by downside risk to growth," she said. "So it's a stagflation conundrum."

"We expect to see meaningful easing from the Fed only in the scenario that economic growth figures really disappoint."

Citing uncertainty due to the potential for macro-economic fallout from tariff policies, Adam Reinert, chief investment officer at Marshall Financial, said: "the Fed needs to retain their conviction and confidence. In the near term, we believe Jay Powell and his team may have to become comfortable with being uncomfortable."

Investors were also focused on the prospects for progress on US-China trade relations during Wednesday's session.

US Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer are scheduled to meet China's top economic official for talks over the weekend in a potential first step for peace after Trump ignited a trade war with the world's No. 2 economy last month.

Bessent said his sense is that the meeting in Switzerland "will be about de-escalation," while China sounded more guarded and cited a proverb about actions speaking louder than words.

On Wall Street, the Dow Jones Industrial Average rose 284.97 points, or 0.70 per cent, to 41,113.97, the S&P 500 rose 24.37 points, or 0.43 per cent, to 5,631.28 and the Nasdaq Composite rose 48.50 points, or 0.27 per cent, to 17,738.16.

MSCI's gauge of stocks across the globe rose 2.12 points, or 0.25 per cent, to 844.03, after falling by around 0.4 per cent earlier. The pan-European STOXX 600 index closed down 0.54 per cent earlier in the day.

In currencies, trading was choppy after the Fed statement and as Powell took questions from reporters, but ultimately the US dollar remained slightly stronger against major currencies including the yen and the euro.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.42 per cent to 99.92.

The euro was down 0.62 per cent at $1.1297 while against the Japanese yen, the dollar strengthened 1.03 per cent to 143.88.

Sterling weakened 0.64 per cent to $1.3282. The Canadian dollar weakened 0.41 per cent to C$1.38 per US dollar.

In US Treasuries, yields slipped after the Fed's update.

The yield on benchmark US 10-year notes fell 4.9 basis points to 4.269 per cent from 4.318 per cent late on Tuesday while the 30-year bond yield fell 4.1 basis points to 4.7718 per cent.

The 2-year note yield, which typically moves in step with Fed interest rate policy, fell 0.8 basis point to 3.781 per cent, from 3.789 per cent late on Tuesday.

Oil prices fell by more than $1 a barrel as investors doubted that the upcoming US-China trade talks will result in a breakthrough, while hopes for an Iran-US nuclear deal eased supply worries.

US crude futures settled down 1.73 per cent, or $1.02, at $58.07 a barrel while Brent settled at $61.12 per barrel, down 1.66 per cent, or $1.03, on the day.

In precious metals, gold prices extended losses, weighed by a stronger dollar and easing China-US trade tensions, while traders were left dissatisfied by Powell's cautious remarks about the US economy.

Spot gold fell 1.8 per cent to $3,367.70 an ounce. US gold futures fell 1.37 per cent to $3,364.70 an ounce.