Dow sheds 631 points as Warsh flags persistent inflation risk
The Federal Reserve raised interest rates for the first time in three years on Wednesday, sending the Dow Jones Industrial Average down 631.21 points, or 1.21%, after Chairman Kevin Warsh warned that inflation remains stubbornly high.
The Fed's Federal Open Market Committee voted 12-0 to lift the overnight funds rate by a quarter percentage point to a target range of 3.75% to 4%, CNBC reported. The increase ended a pause dating to 2023 and came with a signal that at least one more hike is likely this year, according to the Fed's Summary of Economic Projections.
The S&P 500 fell 0.45% to close at 7,551.81, while the Nasdaq Composite slipped 0.01% to 25,978.42, CNBC reported. All three major indexes had traded higher earlier in the session before the Fed's announcement, according to CNBC.
Inflation warning triggers selloff
"This summer's inflation readings do not tell me that underlying trends have meaningfully improved," Warsh said at his post-meeting press conference.
The 10-year Treasury yield climbed back above 5% following those remarks, a level Art Hogan, chief market strategist at B. Riley Wealth, called "a massive psychological level," according to CNBC. The 30-year Treasury yield edged down about 1 basis point to 5.348%, while the 2-year yield held near 4.646%.
Bank stocks led the market lower: Bank of America and Wells Fargo each declined nearly 3%, while American Express and Goldman Sachs fell almost 4%. Shares of American Express and Goldman Sachs also fell nearly 4%.
“A sustained tightening cycle could weigh on customer activity, and derail capital markets momentum if financial conditions tighten materially,” said Bank of America Securities analyst Ebrahim Poonawala said in a note cited by CNBC.
Diesel prices have climbed to a record $6.23 a gallon on average, and oil is trading above $100 a barrel, conditions cited alongside a stronger August jobs report as evidence supporting the committee's unanimous stance, according to Yahoo Finance.
Transportation stocks fell, with the Dow Jones Transportation Average down more than 2% and J.B. Hunt plunging over 13% after warning of weaker third-quarter earnings.
Advisers recalibrate for "higher for longer"
The 12-0 vote marked a shift from July, when the committee held rates steady in a 9-3 split, Yahoo Finance reported. David Krakauer, vice president of portfolio management at Mercer Advisors, said the change in tone was significant. "A unanimous hike materially raises the probability of another move before year-end," Krakauer said.
Daniel Siluk, portfolio manager and head of global short duration and liquidity at Janus Henderson, said the decision addressed doubts about the central bank's resolve. "Today's decision reduces the risk that investors question the Fed's inflation-fighting resolve," Siluk said, according to InvestmentNews.
UBS Wealth Management USA raised its 2026 forecast to two rate hikes earlier this month, anticipating moves in September and December, TheStreet reported. UBS executive director and senior US economist Andrew Dubinsky said in a Sept. 7 note that a more hawkish Fed does not necessarily signal a weaker investment outlook, according to TheStreet.
The 30-year fixed mortgage rate rose to 7.24%, its highest level since Jan. 14, 2025, according to Mortgage News Daily data.
