Key facts
- The S&P 500 closed down 0.44% at 7,552.34.
- The Dow Jones Industrial Average fell 1.19% to 51,462.55.
- The Nasdaq 100 closed up 0.02% at 28,945.06.
- The 10-year Treasury yield rose back above 5%.
- The 2-year Treasury yield spiked 6 basis points to 4.72%.
- The Fed's projections indicate one more rate hike is expected this year.
Markets reacted negatively to the Federal Reserve's recent interest rate hike, reversing earlier positive sentiment as concerns about persistent inflation resurfaced. Following the Fed's announcement of its first rate increase in three years, initial market reactions were favorable, with stocks showing gains and key bond yields declining. However, this optimism waned as Federal Reserve officials, including Kevin Warsh, conveyed that inflation is still viewed as a significant risk requiring further monetary tightening.
By the close of trading, major indices had turned negative. The S&P 500 ended down 0.44%, the Dow Jones Industrial Average fell 1.19% (or 630.56 points), and the Nasdaq 100 managed a slight gain of 0.02%. The 10-year Treasury yield climbed back above 5%, and the 2-year Treasury yield, highly sensitive to Fed policy, jumped 6 basis points to 4.72%.
The Fed's own economic projections suggest one more rate hike is anticipated before the year's end. However, some investors are pricing in even more aggressive action. According to the CME FedWatch tool, the probability of a 50 basis point hike by year-end rose to 38%, a significant increase from 10% last week.
Analysts noted that the Fed's 'dot plot' signals a clear message: interest rates may increase further and stay at elevated levels for longer than previously expected. Officials emphasized that policy needs to be more restrictive to meet the 2% inflation target, with decisions not swayed by recent bond market volatility. The hawkish tone from the press conference was seen as driving up futures and bond yields while pushing equities lower.