Stocks jump 3% after Jerome Powell calms fears that the Fed will raise interest rates too fast.

Stocks on Wall Street had their best day since 2020 on Wednesday, after Jerome H. Powell, the Federal Reserve chair, said that central bankers weren’t considering exceptionally large increases in interest rates, calming investors who had begun to worry that the fight against inflation might push the economy into a recession.

The S&P 500 rose 3 percent, the biggest jump since May 2020, spiking after Mr. Powell’s comment. Earlier on Wednesday, the Fed said it would lift interest rates by half a percentage point, an increase that was widely expected, and that it plans to shrink its bond holdings.

Bond yields, a proxy for investor expectations about interest rates, ticked lower. The yield on 10-year Treasury notes fell eight basis points, or 0.08 percentage points, to 2.92 percent.

Inflation is at its highest in four decades, and the Fed is quickly withdrawing monetary support as it looks to cool the economy down. It has created an uncertain outlook on Wall Street that has investors questioning whether this is the right moment to own risky assets like stocks, and whether the Fed could go too far as it tries to cool the economy down and might, in the worst case, cause a recession.

The S&P 500 was down more than 12 percent for the year at the end of trading on Tuesday, including an 8.8 percent plunge in April that was triggered by a sudden shift in views on what the Fed will do next. Some Wall Street analysts and investors had begun to raise the prospect that the central bank might increase rates by as much as 0.75 percentage points at one of its upcoming meetings.

Speaking during a news conference on Wednesday, Mr. Powell signaled that the Fed could continue to approve increases of as large as half a percentage point, but he was clear that an even larger increase — of 0.75 percentage points — was “not something the committee is actively considering.”

“Market observers over the last week were starting to think that a 75 basis point increase was a possibility, even though it was a remote,” said Emily Bowersock Hill, the chief executive of Bowersock Capital Partners, a financial management firm.

The “euphoria” in the stock market on Wednesday, Ms. Bowersock Hill said, also reflected the fact that the Fed didn’t say anything that investors weren’t already expecting.

Some of the factors driving inflation are out of the Fed’s hands. The Russian invasion of Ukraine has added to trouble in the already fragile global supply chain and has raised energy and food costs around the world. A coronavirus outbreak in China is expected to add to bottlenecks and production slowdowns that have driven prices for goods higher.

The Fed acknowledged those risks in its policy statement Wednesday, saying that Russia’s invasion of Ukraine and “related events are creating additional upward pressure on inflation and are likely to weigh on economic activity.”

“In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions,” they said.”

Mr. Powell also acknowledged that the central bank’s efforts to cool the economy without causing a recession would be tricky. “I do expect that this will be very challenging; it’s not going to be easy,” he said.