Fed Raises Rates by Quarter Point

In the bond market, Treasury yields, indicative of the cost of borrowing for the U.S. government and a benchmark for mortgages and other loans, fell.

This is not how things have gone for most of the past year: Rising interest rates raise costs for consumers and companies, and the prospect of more increases has typically triggered stock market declines.

But lately, investors have latched on to signs that inflation is slowing, encouraging many to forecast that the end of the Fed’s rate increases is near, even as the central bank has warned that their fight against inflation is far from over.

Trading on Wednesday illustrated the growing dissonance between investors and the Fed. Going by the market’s move, it appears that investors are increasingly distrustful of the Fed’s own forecasts.

“He did say ongoing hikes but I still don’t believe it,” said Andrew Brenner, head of international fixed income at National Alliance Securities. Mr. Brenner believes the rate increase made Wednesday will be the Fed’s last. He said the market had lost faith in the Fed’s forecasts after a year in which interest rates unexpectedly rose 4.5 percentage points. “This Fed has been more wrong than right and I think you can fight the Fed,” he said.

Mr. Brenner is not alone in his prediction. Though most investors are still forecasting another 0.25 percentage point rate increase in March, that outlook — reflected in trading in futures markets — is still below the Fed’s own forecasts for two more quarter-point raises. Markets are also pricing in a cut in interest rates later this year, something Mr. Powell tried to rule out on Wednesday.

“I just don’t see us cutting rates this year,” he said.

Investors weren’t moved. The 10-year Treasury yield, which underpins borrowing costs around the world, fell 0.1 percentage points on Wednesday to 3.42 percent. The two-year Treasury yield, which is sensitive to changes in Fed policy, also fell 0.1 percent points to 4.12 percent.

Technology stocks, among the worst performing in 2022 because of their sensitivity to higher interest rates, have rallied this year. The Nasdaq Composite, stuffed full of technology stocks, jumped 2 percent on Wednesday. It has climbed nearly 13 percent this year, notching its best start to a year since 2001.

Still, the stock-market rally Wednesday is not going to be the final word on this matter.

Rising stock prices and falling bond yields have created a problem for the Fed, enriching investors and making it easier for them to borrow, undercutting efforts to pull down still high inflation.

“This loosening of financial conditions is undoubtedly not what the Fed was aiming for, and we expect a cacophony of Fed speeches in the…