Stocks climb as Wall Street prepares for Fed rate hike

Stocks jumped on Wednesday as investors anxiously awaited potentially aggressive action from the Federal Reserve to tame surging inflation.

The Dow Jones Industrial Average gained 220 points, or 0.7%, while the S&P 500 rose 1% and Nasdaq Composite jumped 1.4%.

The market moves come as investors await a decision on rate hikes from the central bank at the conclusion of its two-day meeting on Wednesday. The market is betting on a more than 95% chance of a 75 basis point rate hike, the biggest increase since 1994, according to the CME Group's FedWatch tool. (1 basis point equals 0.01%)

The shift to price in a larger-than-usual rate hike came after headlines that Fed officials were contemplating such a move following a surprisingly hot inflation reading and worsening economic outlook.

"The change in the headline from 50 basis points to 75 basis points reflects a stark reality but it also reflects the Fed's determination to underscore its commitment to its mandate to maintain price stability," said Quincy Krosby, chief equity strategist at LPL Financial. "It's neither a trial balloon nor a lead balloon — it's reality."

All major sectors aside from energy were in the green on Wednesday. Communication services and consumer discretionary led the rally, gaining roughly 2% as technology stocks Tesla, Amazon, Apple and Alphabet rose. Financials also staged a 1.6% rebound while shares of Boeing, Goldman Sachs and Cisco jumped 5%, 3% and 2%, respectively, bringing the Dow higher.

Beaten-up travel names also staged a rebound, with cruise stocks Carnival and Norwegian Cruise Line rising about 3% and 4%, respectively. Shares of airline stocks including Delta and United also rose about 4% each.

Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. ET following the central bank's policy decision. Investors will be monitoring his language and tone about the Fed's tightening path forward. The central bank will also release its outlook for its benchmark rate, inflation and GDP.

"While all eyes will be on the Fed this afternoon, we expect next phase of the current bear market to be driven by rising recession risks and a downward earnings revisions cycle," wrote Wolfe Research's Chris Senyek.

Treasury yields, which have jumped dramatically this week in anticipation of the big rate hike, pulled back on Wednesday. The 2-year rate, most sensitive to changes in monetary policy, surged 40 basis points this week alone to hit its highest level since 2007. The benchmark 10-year yield popped more than 30 basis points to top 3.48%, a high not seen since April 2011.

Some notable investors believe the central bank can regain credibility by acting aggressively to show its seriousness in combating inflation.

The Fed "has allowed inflation to get out of control. Equity and credit markets have therefore lost confidence in the Fed," wrote Pershing Square's Bill Ackman in a tweet Tuesday. "Market confidence can be restored if the Fed takes aggressive action with 75 bps tomorrow and in July" and makes a commitment to aggressive increases until inflation "has been tamed."

Meanwhile, some traders anticipate more pain ahead for the markets.

"We think risk assets will still have to correct lower and remain firmly risk-off in our tactical asset allocation," wrote HSBC Global Research's Max Kettner. "The very recent market obsession surrounding a 'bear market rally' now appears to be something of a fad," he added.

Wednesday's moves came after the S&P 500 suffered a five-day losing streak and dipped further into bear market territory on Tuesday. The index has already fallen more than 3% this week already and is now off nearly 22% from its all-time time hit in early January. The blue-chip Dow slid about 150 points Tuesday, also falling for a fifth straight day Tuesday. The Nasdaq Composite ended Tuesday slightly higher.