Key Highlights

● The Fed upgraded its description of activity from solid to a strong pace.

● Third-quarter GDP beat forecasts and accelerated sharply from the second quarter.

● Of 253 S&P 500 companies reporting, the large majority beat expectations.

● The Russell 2000 jumped 28.71 points to 2,859.22 on domestic strength.

A single word change in the Federal Reserve's statement on Wednesday signaled a more confident read on the economy, and Thursday's growth data quickly backed it up.

From "solid" to "strong"

Fed watchers scrutinize every word of the central bank's policy statement, and on Wednesday, October 28, one change stood out. The statement said economic activity "is expanding at a strong pace," according to media reports. The previous statement had described the pace as "solid."

It may look like a small edit, but in the carefully calibrated language of central banking, moving from "solid" to "strong" is a notable upgrade. It tells markets that policymakers see the economy running hotter than before, which matters when Inflation is still above target.

A faster-growing economy can keep Demand strong enough to sustain price pressures, which is why a more upbeat description of growth often reads as hawkish rather than merely cheerful. This was not a meeting with new economic projections, which made the statement's wording all the more important.

The decision around it

The upgrade came alongside a decision to hold interest rates steady after a September hike. The vote was 10 to 2, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favor of another increase. The statement also added that "accumulating more information will help the Committee determine the appropriate stance of policy."

Chair Kevin Warsh reinforced the upbeat tone at his press conference, calling labor market conditions "quite positive." He paired that with a warning on prices: "It's our responsibility to get inflation down."

Thursday's data confirmed the call

The next morning, the Commerce Department's advance estimate of third-quarter GDP arrived at 8:30 a.m. ET and validated the Fed's language. Growth beat forecasts and accelerated sharply from the second quarter. Business Investment soared, and consumer spending rose solidly even with oil prices above $100 a barrel, according to market data.

Corporate America is telling a similar story. Of the 253 S&P 500 companies that had reported third-quarter results by Thursday, the large majority beat expectations, according to market data. Caterpillar (NYSE:CAT) reported a record Backlog of about $78 billion, and Vertiv (NYSE:VRT) chief executive Giordano Albertazzi said the industry is "in the middle of the largest infrastructure buildout."

The catch: inflation

A strong economy is welcome, but it complicates the Fed's inflation fight. September PCE inflation ran hot, with energy and gasoline prices jumping amid a war-related oil squeeze, according to one report. Warsh said Americans are "still dealing with inflation that has been running above the committee's objective."

One Wealth advisor said, "Today's data strengthens the case for another rate increase in December."

Market reaction

The strong-growth narrative helped small caps, with the Russell 2000 jumping 28.71 points to 2,859.22, as investors rotated into domestically focused companies. Health care, real estate, utilities and financials also rallied. The broader S&P 500 slipped 23.59 points to 7,720.39, but that was mostly due to Alphabet (NASDAQ:GOOGL)'s plunge after its Earnings miss.

Gold fell to about $4,025 an ounce, according to market data, which said strong GDP and hot inflation supported Fed tightening bets. The 10-year Treasury Yield eased back from multi-decade highs.

What to watch

The Fed's upgraded language puts more weight on upcoming data. Friday's third-quarter Employment Cost index will show whether labor costs are rising with the economy. The November 3 midterm elections and oil prices, tied to the conflict involving Iran, add uncertainty. The Fed's next decision on December 8 to 9 will show whether "strong" growth translates into another rate hike, as two policymakers argued this week.