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Dow gives up 500-point gain and trades lower as Fed signals rate hikes ahead to fight inflation

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U.S. stocks fell in volatile trading Wednesday after Federal Reserve Chairman Jerome Powell suggested the central bank has plenty of room to raise interest rates before it would harm the economy.

The Dow Jones Industrial Average fell 240 points, or 0.7%. The Dow was up more than 500 points earlier in the session. The S&P 500 fell 0.5%. The Nasdaq Composite added 0.4%.

Stocks came off their highs and Treasury yields jumped to their highs after Powell said at a press conference there was “quite a bit of room” to raise rates before it would hurt the labor market.

Powell also said prices could run higher as “inflation risks are still to the upside.”

The Fed said in a statement Wednesday following its policy group’s January meeting that a quarter-percentage-point increase to its benchmark short-term borrowing rate could be coming soon, as market participants expected.

“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Federal Open Market Committee statement said. The Fed does not meet in February.

Stocks rose initially after that statement and before Powell began talking. However, the market began to gyrate as Powell spoke, continuing a pattern of volatility this week in markets.

The Fed also indicate in a separate statement that it would begin shrinking its balance sheet after hiking rates, a further tightening action that many traders may have hoped the central bank would have held off doing right away.

Shares of banks, which typically benefit from higher interest rates, got a lift from the Fed update and supported the market. Morgan Stanley and JPMorgan both rose around 2%.

Investors also digested a strong quarterly report from Microsoft and other corporate earnings results.

Shares of Microsoft rose 5% after the company issued better-than-expected quarterly revenue guidance, boosting the three major indexes.

Microsoft’s “conference call went well and ignited the market,” Scott Redler of T3Live said. Whether the stock’s rally holds “will tell us a lot about tech,” he added.

Technology shares gained following Microsoft’s earnings report. Apple, Amazon, Netflix and Nvidia all traded higher. Tesla shares added 5.7%, with the electric vehicle marker slated to report earnings after the bell.

On the downside, Boeing fell 2.6% after the aircraft maker reported positive cash flow for the first time since 2019, but it took a $3.5 billion pre-tax charge on its 787 Dreamliner program.

U.S. stocks are coming off a second consecutive roller-coaster trading session.

The Dow ended Tuesday lower, but was down as much as 818.98 points on the session and briefly traded up by as much as 226.54 points. Those moves came a day after the Dow recovered from a 1,115-point deficit to post a slight gain.

The S&P 500 and Nasdaq Composite also closed well off their session lows on Tuesday, but still lost 1.2% and 2.3%, respectively.

All three major indexes are negative in January. The Nasdaq is in correction territory, down more than 14% from its intraday high.

–CNBC’s Patti Domm contributed to this report.

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