Market Indexes Bounce Back From the Fed's Rate Hike

Wednesday's rate hike knocked more than 630 points off the Dow. Thursday morning, Wall Street decided it had overreacted, and chip stocks led the apology tour.

The Nasdaq Composite (NASDAQINDEX: ^IXIC) rose 1.4% as of 11:24 a.m. ET, the S&P 500 (SNPINDEX: ^GSPC) added 0.9%, and the Dow Jones Industrial Average (DJINDICES: ^DJI) gained 0.4%. Twenty of the Dow's 30 components traded higher at this moment.

^IXIC data by YCharts

Chips did the heavy lifting again

Speaking at a tech conference, Intel (NASDAQ: INTC) CEO Lip-Bu Tan said his company can only meet 50% of CPU demand due to limited manufacturing capacity and a shortage of memory chips. He also accelerated the ramp-up of new manufacturing nodes, and a couple of analysts posted bullish reports on the stock. Intel is up 8.6% on a bundle of news that also boosted memory makers.

I don't know that investors needed another reminder of soaring memory prices, but there you go. Micron Technology (NASDAQ: MU) is up 5.8%, and SK Hynix (NASDAQ: SKHY) rose 3.9%.

Other chip stocks tagged along. Nvidia (NASDAQ: NVDA) rose 2.5% and was the biggest single boost to both the S&P 500 and the Nasdaq Composite. Advanced Micro Devices (NASDAQ: AMD) gained 6.2%.

The macro backdrop cooperated for once. The 10-year Treasury yield fell more than 5 basis points to 4.949%, dropping back under the 5% level it crossed on Wednesday. The oil sector also relaxed on reports that Saudi Arabia will supply more crude to Asian refiners through ship-to-ship transfers near Oman's Sohar port. U.S. crude slipped about 1% to roughly $100 a barrel and Brent fell 2% to about $102.

The Dow's smaller gain largely rested on one stock with close ties to the AI data center construction trade. Caterpillar (NYSE: CAT) rose 1.9% and contributed 89 Dow points, more than twice the next-largest contribution.

Sixteen of eighteen Fed officials want another hike this year

Wednesday's decision lifted the federal funds target range to 3.75% to 4% on a unanimous 12-0 vote. Most market analysts had expected a dissent or two, but this was a clean all-in vote.

That's not the end of the Fed story, though. The dot plot is the part worth remembering. 16 of 18 participants expect at least one more increase before the end of 2026, and 10 of them don't see any cuts at all through 2029. Chair Kevin Warsh kept the explanations to a tight 130 words. In his view, inflation needs to come down.

Thursday's rally looks a bit awkward against that backdrop. UBS Global Wealth Management's Mark Haefele says his team projects more gains while bracing for volatility along the way.

There's another kind of inflation at play today, too. The AI boom is generating its own runaway pricing situation. Cloud provider Nebius (NASDAQ: NBIS) is raising on-demand prices on Oct. 1, with Nvidia H100 rentals up roughly 17% and B300 up about 21%. Nebius also increased the price of access to AMD CPUs.

Intel's memory complaint says the same thing from a different angle. Computing is getting expensive, and the cloud platform providers are getting tired of carrying the costs.

So the Fed finally moved. Now the market has to guess how far it goes. Stay tuned for more drama tomorrow, next week, and beyond.

Anders Bylund has positions in Intel, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Caterpillar, Intel, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.