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U.S. stocks moved higher Wednesday morning as investors awaited the Federal Reserve’s latest interest rate decision, set for release this afternoon. The Dow Jones Industrial Average rose 181 points, or 0.6%, while the S&P 500 gained 0.7% and the tech-heavy Nasdaq Composite added 0.8%.

Information technology stocks led the market higher, with semiconductor names like Advanced Micro Devices and Micron Technology surging on upbeat guidance. The rally came despite mixed economic data showing a contraction in manufacturing activity but a slight uptick in job openings in September.

All eyes are on the Fed’s 2 p.m. policy statement, which is expected to maintain rates steady following four consecutive 0.75 percentage point hikes. Traders anticipate the Fed will signal plans to slow its aggressive tightening campaign starting in December as it assesses the impact on the economy.

Treasury Yields Retreat as Focus Shifts to Fed

A notable decline in Treasury yields provided a tailwind for stocks ahead of the Fed decision. The benchmark 10-year Treasury yield pulled back to around 4.08% after starting the week above 4.2%. Lower long-term rates boost the relative appeal of equities.

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The retreat in yields came after the Treasury detailed its upcoming bond sales. The sizable supply was in line with estimates, helping allay concerns about the ballooning federal debt. The Fed’s impending rate pause is also seen putting a lid on yields.

With the Fed widely expected to stand pat, investors are focused on clues around future rate moves and commentary on the economic outlook. Markets hope the Fed opens the door to slowing its tightening campaign as risks of recession rise.

Manufacturing Slumps While Job Openings Edge Up

In economic data released Wednesday, the October ISM manufacturing index fell to 46.7, showing a steeper contraction in factory activity than anticipated. However, job openings unexpectedly ticked up in September per the Labor Department’s JOLTS report.

The data paints a mixed picture of the economy heading into the Fed meeting. Jobs remain plentiful but manufacturing is suffering from rate hikes designed to cool demand.

ISM Manufacturing Index

“The manufacturing side of the economy is getting hit the hardest as the Fed continues to be aggressive,” said Cliff Hodge, chief investment officer at Cornerstone Wealth. “I expect manufacturing activity to continue to contract over the next few quarters.”

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Tech Stocks Surge Ahead of Big Earnings

Information technology stocks led the market higher Wednesday, with semiconductor companies AMD and Micron Technology jumping over 5% each. Nvidia and Microsoft also posted notable gains.

The rally comes ahead of major tech earnings after the bell. Qualcomm, PayPal and Roku will all report quarterly results along with several other tech names. Solid results could provide a further boost.

However, some analysts view the recent rebound in stocks as an oversold bounce within an ongoing bear market rather than a sustainable new uptrend. The S&P 500 remains down nearly 20% in 2022 despite this week’s gains.

Focus Remains on Inflation Fight Despite Stock Rebound

While the recent stock rebound may reflect hopes of a less aggressive Fed, central bankers have stressed their commitment to restoring price stability. Another 75 basis point hike is on the table for December if upcoming inflation data remains stubbornly high.

“The Fed wants to see actual progress in terms of inflation coming down before they let up on the brakes,” said David Donabedian, chief investment officer at CIBC Private Wealth. “I don’t think the tone will be dovish just yet.”

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Markets expect interest rates to peak around 5% by early 2023. While the Fed may slow the pace of hikes, further tightening is anticipated to cool inflation running near 40-year highs. The central bank’s statement today should provide critical clues on the path forward.

As the Fed decision looms, investors are closely monitoring policymakers’ thinking around their inflation fight and future rate moves. Steady rates are anticipated today, but the Fed’s tone will set expectations for months ahead as it balances fighting inflation with risks of recession.

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