U.S. stocks advanced on Tuesday after a smaller-than-forecast climb in consumer prices buoyed optimism the Federal Reserve could soon dial back its aggressive path of interest rate hikes aimed at taming inflation.

The benchmark S&P 500 (.SPX) rose as much as 2.76% in the session to a three-month high on news that November U.S. consumer prices barely rose as the cost of gasoline and used cars dropped, leading to the smallest annual inflation increase in nearly a year at 7.1%.

Rising expectations for smaller and slower Fed rate hikes helped lift rate-sensitive gauges to their highest levels in nearly three months, with S&P 500 Growth index (.IGX) last up 1.19%, and the S&P 500 Real Estate index (.SPLRCR) 1.63% higher.

Fed funds futures prices implied a better-than-even chance that the Fed will follow an expected half-point interest rate hike this week, with smaller 25-basis point rate hikes at its first two meetings of 2023, and stopping shy of 5% by March.

Morgan Stanley’s chief U.S. economist Ellen Zentner now sees even smaller Fed’s rate hikes, of 25 basis points at the February meeting, and no further increases in March, leaving the peak fed funds rate at 4.625%.

Still, equities had pared gains ahead of the Fed’s policy statement on Wednesday, in which the central bank is widely expected to announce a 50 basis point rate hike.

“We have to wait until we hear what the FOMC says tomorrow. Maybe if the FOMC says yes, this was a good number and it changes our approach to hiking then it is worth waiting,” said Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co in West Conshohocken, Pennsylvania.

“If you were predisposed to buy on a good number, you just want to wait and see how the committee interprets it.”

The Dow Jones Industrial Average (.DJI) rose 96.23 points, or 0.28%, to 34,101.27; the S&P 500 (.SPX) gained 29.6 points, or 0.74%, at 4,020.16; and the Nasdaq Composite (.IXIC) added 114.87 points, or 1.03%, at 11,258.61.

Energy shares (.SPNY) rose 1.92% as the softer-than-anticipated inflation data sent the dollar lower and boosted crude oil prices.

The numbers follow November’s slightly higher-than-expected producer prices report last week, which, however, pointed to a moderation in the trend.

Moderna Inc (MRNA.O) surged 23.06% after the biotechnology firm’s experimental vaccine in combination with Merck & Co Inc’s (MRK.N) blockbuster drug Keytruda showed promising results in a skin cancer study. Merck shares rose 1.97%.

Pinterest Inc (PINS.N) jumped 11.94% after Piper Sandler upgraded the social media platform’s stock to “overweight” from “neutral.”

Advancing issues outnumbered decliners on the NYSE by a 3.18-to-1 ratio; on Nasdaq, a 1.65-to-1 ratio favored advancers.

The S&P 500 posted 18 new 52-week highs and one new low; the Nasdaq Composite recorded 81 new highs and 167 new lows.

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