Wall Street is already celebrating the first rate hike in nearly a decade.
U.S. stocks rallied on Wednesday morning as investors widely anticipate the Federal Reserve will make an historic decision later in the day to increase interest rates.
The move would represent a major vote of confidence in the American economy’s recovery from the Great Recession, which caused the Fed to slash rates to zero for the first time ever.
The Dow climbed over 150 points, while the S&P 500 and the Nasdaq rallied 0.8%. It’s a sign that Wall Street is ready for the Fed to move when it announces its decision at 2 p.m. ET.
A rate hike, the first since 2006, would remove deep uncertainty that has been hovering over Wall Street for months.
“There will be this sense of relief that a big overhang/albatross has been lifted,” Michael Block, chief strategist at Rhino Trading, wrote in a note to clients.
However, stocks could tumble if recent turbulence in financial markets — especially in the junk bond market — causes the Fed to delay a move like it did in September. That would reinforce concerns about the strength of the U.S. economy.
“Should the Fed surprise markets and not hike (not our expectation, but not impossible) expect major volatility, as markets struggle to digest the implications. This is a risk that you need to be aware of,” Bespoke Investment Group wrote in a note to clients.
Assuming the Fed doesn’t shock the market with a further delay, the real key will be how the central bank telegraphs future rate increases. If the Fed signals a very patient approach going forward, it could further boost sentiment on Wall Street. That would lower the chances that aggressive policy could kill the economic recovery.
Fed chief Janet Yellen will have a great opportunity to set expectations when she fields questions from reporters at 2:30 p.m. Watch for how many times she uses the word “gradual,” or something similar.
