S&P closes higher after Fed minutes confirm inflation focus

By Sinéad Carew and Amruta Khandekar

(Reuters) - The S&P 500 finished higher on Wednesday but below its session peak after volatile trading following the release of minutes from the Federal Reserve's last meeting, which showed officials laser-focused on controlling inflation even as they agreed to slow their interest rate hiking pace.

Officials at the Fed's Dec. 13-14 policy meeting agreed the U.S. central bank should continue increasing the cost of credit to control the pace of price increases, but in a gradual way intended to limit the risks to economic growth.

Investors were poring over the Fed's internal deliberations for clues about its future path. After the meeting, Fed Chair Jerome Powell had said more hikes were needed, and took a more hawkish tone than investors had expected back then.

While some money managers said the minutes included no surprises, the market appeared to have been holding onto hopes for some sign that the Fed was at least considering easing its policy tightening.

"The market is like a kid asking for ice cream. The parents say 'no,' but the market keeps asking because the parents have caved in the past," said Burns McKinney, portfolio manager at NFJ Investment Group LLC in Dallas. "The market still thinks it's going to get ice cream, just not as soon as they thought before."

McKinney pointed to the minutes for evidence of Fed officials' concern that an unwarranted easing of financial conditions would complicate their efforts to fight inflation.

The Dow Jones Industrial Average rose 133.4 points, or 0.4%, to 33,269.77; the S&P 500 gained 28.83 points, or 0.75%, to 3,852.97; and the Nasdaq Composite added 71.78 points, or 0.69%, to 10,458.76.

The S&P's rate-sensitive technology index lost some ground after the minutes before finishing up 0.26%. Even the bank sector, which benefits from higher rates, pared gains but still finished up 1.9%.

Energy was the weakest of the S&P's 11 major industry sectors, closing up 0.06%, while real estate was the strongest, closed up 2.3%, followed by a 1.7% gain in materials.

Also on Wednesday, Minneapolis Fed President Neel Kashkari also stressed the need for continued rate hikes, setting out his own forecast that the policy rate should initially pause at 5.4%.

"The Fed minutes are a good reminder for investors to expect rates to remain high throughout all of 2023. Amid a persistently strong job market, it makes sense that fighting inflation remains the name of the game for the Fed," said Mike Loewengart, head of model portfolio construction at Morgan Stanley (NYSE:MS) Global Investment Office in New York.

"Bottom line is that, even though we flipped the calendar, the market headwinds from last year remain.”

Market participants now see a 68.8% chance of a 25 basis points rate hike from the Fed in February, but still see rates peaking just below 5% by June..

Earlier in the day, data showed U.S. job openings in November indicating a tight labor market, giving the Fed cover to stick to its monetary tightening campaign for longer, while other data showed manufacturing contracted further in December.

U.S. equities were pummeled in 2022 on worries of a recession due to aggressive monetary policy tightening, with the three main stock indexes logging their steepest annual losses since 2008.

On the Nasdaq 100 the largest gainer was U.S. shares of JD (NASDAQ:JD).Com Inc, which rose 14.7% on hopes for a post-COVID-19 recovery in China. The largest decliner was Microsoft (NASDAQ:MSFT), down 4.4% after a UBS analyst downgraded the stock to "neutral" from a "buy" rating.

Advancing issues outnumbered declining ones on the NYSE by a 4.30-to-1 ratio; on Nasdaq, a 2.74-to-1 ratio favored advancers.

The S&P 500 posted five new 52-week highs and no new lows; the Nasdaq Composite recorded 84 new highs and 51 new lows.

On U.S. exchanges 11.35 billion shares changed hands, compared with the 10.83 billion-share average for the last 20 trading days, which included some volume weakness due to the holidays.