Stocks rebounded on Wednesday after the US Federal Reserve delivered a smaller interest rate increase in its historic fight against inflation.
The Fed raised interest rates by 25 basis points, while indicating that more increases are to come.
This is its eighth rise since last year. The latest announcement brings the Fed's target range to between 4.50 per cent and 4.75 per cent — about 50 basis points away from its end-of-year projection of 5.1 per cent.
The central bank said “ongoing increases” would be needed to bring inflation down to its long-term 2 per cent goal.
Fed Chairman Jerome Powell said recent data suggested the “disinflationary process” has begun, but warned it was only in the early stages.
“We will stay the course until the job is done,” Mr Powell said in a common refrain as he continues to warn against loosening monetary policy too soon.
He said the committee would adjust its 2023 forecast in March.
Stocks posted gains after the announcement, but traders appeared to be optimistic that the Fed would not increase rates at the same aggressive pace as last year.
The S&P 500 gained one per cent after falling close to one per cent earlier.
The Dow Jones Industrial Average rose 6.92 points after dropping more than 500 points earlier in the day. The Nasdaq Composite gained 2 per cent.
The central bank's meeting follows reports showing slower wage growth, a stumbling housing market and an overall cooling of inflation.
But at 6.5 per cent, inflation remains well above the Fed's long-term 2 per cent goal.
Mr Powell was encouraged by the data the Fed has seen since its December meeting, but said there was not enough progress in bringing prices down to that 2 per cent goal.
“We will need substantially more evidence to be confident that inflation is on a sustained downward path,” he said.
And the jobs market remains stubbornly hot, with more than 11 million vacancies in the country in December, data from the Labour Department showed.
That equates to 1.9 positions for every job seeker, up from 1.7 a month earlier.
The unemployment rate remains at 3.5 per cent, a 53-year low.
Mr Powell has repeatedly stated the need for a softer labour market — ostensibly in the form of lay-offs — to loosen monetary policy.
That puts him at odds with some US politicians who have asked the Fed to focus more on unemployment. Their calls to pause interest rate increases, however, have been ignored.
The Fed has been trying to ease the burden of high prices without driving the economy into a recession, known as a soft landing. But there are concerns that its actions are too aggressive.
A report last week showed the US economy had entered the year with weak momentum, as consumer spending dipped during the holiday months and savings increased.
And data on Tuesday showed consumer confidence in the US declined at the turn of the year amid fears over the jobs market, business conditions and the possibility of a recession.
The Consumer Confidence Index fell to 107.1, down from 109.0 in December, the Consumer Conference Board reported.
“Consumers were less upbeat about the short-term outlook for jobs. They also expect business conditions to worsen in the near term,” said Ataman Ozyildirim, senior director of economics at board.
US consumers were optimistic about economic and labour conditions to begin the year, but a decrease in the Expectations Index for January showed “their concerns about the economy over the next six months”, Mr Ozyildirim said.
The expectations index — which measures consumers' short-term outlook on income, business and labour market conditions — fell to 77.8. A reading below 80 typically indicates a recession within the next year, the board said.
Consumers also expect incomes to remain stable in the coming months, although few are planning to buy a new or existing home. Higher mortgage rates continue to push prospective buyers out of the market.
The US Labour Department will on Friday release its unemployment report for January, giving Fed officials a greater indicator of how interest-rate increases are affecting the labour force.