Stocks pull back after Fed raises rates, points to another hike this year

The Federal Reserve raised interest rates on Wednesday and flagged further increases in borrowing costs in coming months, with new US central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration’s inability so far to control inflation. 

Speaking in Washington after the decision’s release, Warsh echoed the official statement in promising the Fed’s policy committee would “deliver ⁠price stability.” Stocks and ⁠bonds sold off late Wednesday afternoon, reflecting expectations that rates may continue to rise for some time.

New policy projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by ⁠the end of this year, with only two of them seeing rates remaining stable from here. Warsh apparently again did not submit a rate projection.

It’s the first policy shift under the new Fed chief, who took office in late May after being selected by Trump with an expectation that he would cut rates.

The Fed’s new policy statement and economic projections, to the contrary, show a central bank opening the door on tighter monetary policy through next year, with the policy rate ​rising to the 4.00%-4.25% range by the end of this year and ending 2027 at the same level.

STOCKS: Major US indexes turned lower as Warsh’s comments came to an end, with the S&P 500 down 1% and the Nasdaq down 0.7%. Both indexes were modestly higher earlier.

BONDS: US Treasury securities were mixed. The 2-year yield, most sensitive to expectations for future Fed policy, rose 7 basis points to 4.732% after earlier declining. The 10-year yield was up 2 bps at 5.012% and the 30-year yield was down 0.5 bps at 5.357%. 

“It’s similar to what we got in July where everything sold off pretty significantly once Chair Warsh’s press conference started. That’s what happened again today.  

“There were expectations that ‌you were going to get a rate hike, which we got. The issue from an equities standpoint, and the reason things are weaker is because Chair Warsh was ‌pretty vague with a lack of specifics and a lack of real content in the press conference.

“He answered all the questions with the right buzzwords but a lot of it was from a 30,000-foot view. The market wanted to get a better sense of after this rate hike, what should we be expecting going forward.

“Similar to two months ago the market didn’t get the type of specifics it was hoping to hear. That’s indicative of the increased frustration from a lot of portfolio managers over Chair Warsh’s style of communication. In his mind, he’s clearly right about how he’s going to go about doing things.”

“The fixed income derivative market was pricing in over a 90 percent chance of a 25bps rate hike at this meeting so ⁠a hike was far from a surprise. The press conference was notably hawkish and we ⁠think this is likely to at least in the near term calm the recent rise in long duration interest rates. It is less clear how this will impact equities but we expect small caps stocks underperform mega caps as financial conditions tighten going forward.”

“The Fed is clearly focused on getting inflation ​lower and while that message was clearly around in the summer, July caused a bit of a wiggle. I think today’s decision and Warsh’s comments signal they are very serious and the unanimous vote really speaks to me, in terms of the intellectual anchors, like Waller, who voted for this. If it wasn’t an election year, it would be pretty clear to me that they would be going back to back. Still, one more hike is on the cards for this year and the risks are we’ll get more rather than less in 2027.”